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21.5 Prepare Journal Entries for a Process Costing System

Journal Entry Flow​

Process costing requires journal entries to record costs as they flow through the production process. The entries differ from job order costing because costs are accumulated by process rather than by job.

1. Purchase Raw Materials​

Transaction: Purchase materials for production

Journal Entry:

300000 Raw Materials Inventory        €5,000
431000 VAT Recoverable                 850
   400000 Accounts Payable                        €5,850
To record purchase of raw materials

PCN Accounts:

  • 300000: Raw Materials (Class 3)
  • 431000: VAT Recoverable (Class 4)
  • 400000: Accounts Payable (Class 4)

2. Issue Materials to Production (Process 1)​

Transaction: Issue materials to Mixing Department

Journal Entry:

310000 Work in Process - Mixing       €4,000
   300000 Raw Materials Inventory                  €4,000
To record materials issued to Mixing Department

PCN Account:

  • 310000: Work in Process (Class 3)
  • Can use sub-accounts: 310001 (Mixing), 310002 (Baking), etc.

3. Record Direct Labor (Process 1)​

Transaction: Incur direct labor in Mixing Department

Journal Entry:

310000 Work in Process - Mixing       €1,500
   440000 Salaries Payable                          €1,500
To record direct labor in Mixing Department

4. Incur Manufacturing Overhead​

Transaction: Pay factory rent (overhead)

Journal Entry:

610000 Manufacturing Overhead         €2,000
   510000 Cash                                      €2,000
To record actual manufacturing overhead

PCN Account:

  • 610000: Manufacturing Overhead (Class 6)

5. Apply Manufacturing Overhead​

Transaction: Apply overhead to Mixing Department (based on allocation)

Journal Entry:

310000 Work in Process - Mixing       €1,200
   610000 Manufacturing Overhead                    €1,200
To apply overhead to Mixing Department

6. Transfer from Process 1 to Process 2​

Transaction: Transfer completed units from Mixing to Baking Department

Journal Entry:

310000 Work in Process - Baking       €6,700
   310000 Work in Process - Mixing                 €6,700
To transfer costs from Mixing to Baking Department
(€4,000 materials + €1,500 labor + €1,200 overhead)

Note: In practice, you might use separate accounts or sub-accounts for each department.

7. Add Costs in Process 2​

Transaction: Add materials, labor, and overhead in Baking Department

Journal Entries:

310000 Work in Process - Baking       €800
   300000 Raw Materials Inventory                    €800
To record materials added in Baking Department

310000 Work in Process - Baking       €1,000
   440000 Salaries Payable                          €1,000
To record direct labor in Baking Department

310000 Work in Process - Baking       €600
   610000 Manufacturing Overhead                    €600
To apply overhead to Baking Department

8. Transfer to Finished Goods​

Transaction: Transfer completed units from Baking to Finished Goods

Journal Entry:

320000 Finished Goods                 €9,100
   310000 Work in Process - Baking                 €9,100
To transfer completed units to Finished Goods
(€6,700 transferred-in + €800 materials + €1,000 labor + €600 overhead)

PCN Account:

  • 320000: Finished Goods (Class 3)

9. Sell Finished Goods​

Transaction: Sell 800 units for €12,000 (excluding VAT), VAT 17%

Journal Entries (Two):

Entry 1: Record Sale

510000 Cash (or 410000 Receivable)   €14,040
   700000 Sales Revenue                          €12,000
   430000 VAT Payable                              €2,040
To record sale of finished goods

Entry 2: Record Cost of Goods Sold

603000 Cost of Goods Sold             €9,100
   320000 Finished Goods                          €9,100
To record cost of goods sold
(800 units × €11.375 average cost)

PCN Accounts:

  • 510000: Cash (Class 5)
  • 410000: Accounts Receivable (Class 4)
  • 700000: Sales Revenue (Class 7)
  • 430000: VAT Payable (Class 4)
  • 603000: Cost of Finished Goods Sold (Class 6)
  • 320000: Finished Goods (Class 3)

Complete Example: Month of Production​

Luxembourg Food Processing Company - November:

Nov 1: Purchase materials

300000 Raw Materials                  €10,000
431000 VAT Recoverable                 1,700
   400000 Accounts Payable                        €11,700

Nov 1-30: Issue materials to Process 1

310000 Work in Process - Process 1    €8,000
   300000 Raw Materials                            €8,000

Nov 1-30: Direct labor in Process 1

310000 Work in Process - Process 1    €3,000
   440000 Salaries Payable                          €3,000

Nov 1-30: Apply overhead to Process 1

310000 Work in Process - Process 1    €2,000
   610000 Manufacturing Overhead                    €2,000

Nov 30: Transfer from Process 1 to Process 2

310000 Work in Process - Process 2   €13,000
   310000 Work in Process - Process 1              €13,000

Nov 1-30: Add costs in Process 2

310000 Work in Process - Process 2    €1,500
   300000 Raw Materials                            €1,500

310000 Work in Process - Process 2    €2,000
   440000 Salaries Payable                          €2,000

310000 Work in Process - Process 2    €1,200
   610000 Manufacturing Overhead                    €1,200

Nov 30: Transfer to Finished Goods

320000 Finished Goods                €17,700
   310000 Work in Process - Process 2              €17,700

Nov 30: Sell 1,000 units

410000 Accounts Receivable           €20,000
   700000 Sales Revenue                          €20,000
   430000 VAT Payable                              €3,400

603000 Cost of Goods Sold            €17,700
   320000 Finished Goods                          €17,700

Accounting for Beginning Work in Process​

If there is beginning work in process, costs are combined with current costs using the weighted-average method.

Example:

  • Beginning WIP: €2,000
  • Current costs: €13,000
  • Total costs: €15,000
  • Equivalent units: 1,200
  • Cost per unit: €15,000 ÷ 1,200 = €12.50

Luxembourg Compliance Note​

In Luxembourg:

  • Must use proper PCN accounts
  • Work in Process accounts for each department
  • Cost flows must be properly recorded
  • Support inventory valuations
  • Maintain process cost records
  • VAT handled correctly
  • Cost of goods sold properly calculated

Think It Through​

How do journal entries in process costing differ from job order costing? Why are the entries structured differently?