Flow of Costs

This is an accounting method that explains the flow of costs among various operations within a business or a company. The flow of cost system is associated with the production or manufacturing cost activities of the business. The manufacturing costs involve a number of other costs such as cost of material, labor cost, overhead costs and many others. This system also recognizes the flow of costs in various manufacturing accounts such as working goods cost, cost of finished goods, and cost of goods sold and the entire summary of income generated via these processes. One thing must be noted that this method do not involve inventory while determining the flow of costs.

Flow of cost of manufacturing can be calculated by using a number of different methods such as LIFO method, FIFO method, weighted average method and specific identification method. Example of flow of costing can be shown as under:-

Suppose a company ABC incurred following manufacturing costs during a specific accounting period

Direct Material Cost ———- $ 30,000

Direct Labor Cost ————- $ 20,000

Overhead Costs Involved —— $ 40,000

Now assume that through this manufacturing process products worth $60,000 were finished and out of them products worth $25,000 were sold for $ 32,000.

Flow of Costs can be determined as follows:-

Work in Process

Costs of Goods Sold

Sales Revenue