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Cash Flows in Process Costing without Journal Entries

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  • 0:00 Process Costing
  • 1:48 Product Flow
  • 2:32 Department Costs
  • 3:56 Cost Accumulation
  • 4:30 Lesson Summary
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Lesson Transcript
Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

Read this lesson to learn how production costs are added to a product as it is being made. You'll also see why it's important for a business to know how cash flow relates to process costing.

Process Costing

In this lesson, we'll take a look at how a business keeps track of its manufacturing costs so it knows just how much to sell its products for. When a business makes its products in bulk, it can use the process costing method of figuring this out.

Using process costing, the production cost of one unit of a product is calculated based on the overall cost to make a large quantity of product. For example, a business that makes organic dog food in bulk will take a look at the total cost to make each batch of dog food. It will then use this number to calculate the cost of each bag it sells. If it costs the dog food company $2,545 to make 4,000 pounds of its dog food, it can take that total production cost of $2,545 and divide it by 4,000 pounds to find the per pound price; in this case, $2,545 / 4,000 = $0.64 per pound.

It's important for businesses to know how much it costs to make a product. If they didn't, they wouldn't know how to price their products so they make a profit. For instance, if the dog food company didn't use process costing and blindly sold its dog food for $0.50 or even $0.60 per pound, it would be losing money and would soon close down. But since the company did its homework and performed the process costing analysis of its product costs, it knows that it needs to price its dog food above $0.64 per pound to make profit.

In this lesson, we'll take a look at how the dog food company calculates its overall cost to manufacture its product. We won't be including any journal entries as this lesson focuses on the process itself.

Product Flow

Calculating your production cost through the process costing method isn't that complicated. But when your product has to go through several different departments or stages, then you'll need to do just a bit of math to find your production cost. The path your product takes as it makes its way from raw materials to finished product is called its product flow.

For the organic dog food company, its product flow might begin with the research team, then move on to the purchasing department. After that, it reaches the kitchen department where it is made. As the dog food moves through these stages, it incurs costs associated with each department. As it relates to process costing, cash flow is how the money adds up during the product manufacturing process.

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