Alright, let's talk about the flow of a cost system.
Now remember, in a non-manufacturing company, you've got one type of inventory, cost of
goods purchased.
In a manufacturing enterprise, we've got three different types of inventory.
What we're gonna be looking at is what we call raw materials or stores control inventory.
We have work in process.
We have finished goods.
And then that goes to cost of goods sold.
So, what I want to do is kind of set up the flow of a cost system so we can understand
how these costs are flowing through.
So, we start out with our raw materials, then work in process, whip it, whip it good, then
our finished goods and then cost of goods sold.
Alright, so raw materials.
We have some beginning plus purchase equals raw materials available.
Raw materials available.
We're gonna have minus some ending equals raw materials used or raw materials requisitioned.
Now notice that this is generally direct materials, right, not indirect, but this would be your
direct materials.
So that is called your raw materials used, raw materials requisitioned.
Now, this is called raw materials.
It's also as I said sometimes called stores control because we're storing our inventory
there.
Then, work in process.
Now, we start out with some beginning work in process plus, whoop, bring that in, that's
generally our direct materials.
This is where you add in your direct labor.
Now remember we said we're using what kind of system?
A normal cost system which means we're gonna use actual materials, actual labor but we're
gonna use some overhead.
What kind of overhead, anybody?
Applied overhead because we don't know how much actual is yet, it's applied.
Now, remember this is applied overhead.
How did we get this?
We took our estimated cost over estimated dollars equals a predetermined rate per whatever
times actual production, equals what?
Equals your actual overhead.
So you can see here, your actual overhead, that goes into where?
Work in process.
Now, come on down, what was the journal entry?
We debited work in process, credited overhead applied.
This is for the overhead.
Where did this debit go?
This debit came into WIP right here.
Hmmm, okay, so that gives you your WIP available, minus ending work in process equals something
called cost of goods completed or cost of goods manufactured, manufactured or completed.
And, they'll use either of those words.
Don't confuse it with cost of goods sold because they haven't been sold, that's completed or
manufactured.
So, then let's come over, I'll move this over a little bit, to finished goods.
So, with finished goods, we have some beginning finished goods plus, whoop, cost of goods
manufactured or completed, equals finished goods available minus ending finished goods
equals costs of goods sold.
That'll then come, whoop, over to here, cost of goods sold.
Now notice, you bring this in, cost of goods sold, plus this is where you adjust for your
over/under.
Remember over here when we had over/under applied.
What happened is we applied 300, we actually spent five, we closed these out, the difference
went to cost of goods sold right here because we were under applied.
So, let's bring it back down.
That's gonna be plus your under applied or minus your over applied equals the real cost
of goods sold number.
So, notice, in a manufacturing company, they have four, I'm sorry, three types of inventory,
raw materials inventory, 'cause it's raw materials ending, work in process ending, finished goods
ending, and the rest goes to cost of goods sold and that's when it becomes an expense,
okay.
So, when we talk about a product cost, you're capitalizing it.
Notice, this is ending, product cost, ending product, ending product, and then finally
you sell it, it becomes an expense.
So the words I want you to note here.
I want you to notice some important words.
Some of the words deal with things like, boom, raw material used to requisition, that's generally
deck of materials.
Here, you got cost of goods manufactured or completed, those flow into finished goods.
Here is your cost of goods sold.
Don't confuse these two, cost of goods sold, cost of goods completed or manufactured, because
they'll ask you about the differences between the two.
So, it's important to understand.
Again, that is the flow of the cost system.
That is how we're flowing, and that as we go through.
Now, realizing again, that at the end, this is gonna be what we applied.
This is the actual over here.
That's where we adjust for over/under applied.
That is what is going to account for our overhead variance.
It's either we spent too much, we were less efficient, our production capacity was down,
something went wrong, that's why we're over or under.
So, again, to understand the flow of the cost system, that's how it all ties together.
But, I want you to see how this predetermined overhead rate, that ties into coming up with
this entry.
Here's actual, here's the difference, that's under applied, that's where we're increasing
our under applied for our cost of goods sold over here, boom.
This is the flow of the system.
Remember this.
One, two, three types of inventory.
If I'm just purchasing a pen and reselling it, I have purchases, that's it.
If I'm manufacturing, I got raw materials, inventory, work in process, inventory, finished
goods, inventory, and then, what do you do?
You whip it good!
Alright, look in your notes.
You'll see there in your notes the flow of the system.
And it's, again, everything is beginning plus some purchase is available minus ending is
boom.
Right, beginning plus you added some, is available, minus what's still here, is what went away.
Where did it go?
Into WIP.
Where did it go?
Into finished goods.
Where did it go?
Cost of goods sold.
So, the stuff went away, it went somewhere.
Looking in your notes, you'll see it says, "To determine direct materials used, "beginning
plus purchase minus ending is used."
Beginning plus purchase minus ending is used.
So, that's that.
The next formula cost of goods manufactured is this.
The next one is cost of goods sold is this, and it flows into there.
That's where you have to adjust for over and under.
Turn the page and you'll see a paragraph that says, "The Most Common Base", "The Most Common
Base."
So look for that paragraph, for about page, I don't know, four, five, six, The Most Common
Base.
The most common base is direct labor hours blah, blah, blah, direct labor dollars, blah,
blah, blah, machine hours.
I bolded those words, direct labor hours, direct labor dollars, machine hours.
So, in looking at 'em, the ones that are most frequently tested, direct labor hours, direct
labor dollars, that's what we're using as our base in order to apply it to get the predetermined
rate times actual equals what you're applying into WIP.
Because, remember, you're applying this right here into work in process as you are working.
That's why we multiple it times actual production.
The problems is, we don't know what the actual bill is.
We haven't gotten our electricity bill yet for the month.
So, I don't know what it is.
But, I can guess-timate.
It's about a 1000 bucks a month.
Let's take that, divided by how many units we usually do, or how many hours we normally
work.
We normally work 1000 dollars, we work 1000 hours.
That's a dollar an hour.
So for every hour she works on that, I'm gonna add a dollar for overhead.
That's how you're doing it.
And then at the end, we've got to adjust because maybe we may be over or we may be under.
So that's important to understand as far as what the flow of a cost system.
In a minute, we'll do some questions and test this stuff out.