Flow of Costs



Manufacturing firms capture the costs of production in three different inventory categories: raw material, work in process, and finished goods. As the product moves through the different phases of production, the associated costs also flow from one category to another. The primary cost areas are direct material, direct labor, and overhead. All costs need to be associated with the product for costing and financial accounting purposes. In cost accounting, the information provides the baseline for pricing and production decisions. In the financial accounting area, the allocation of labor and overhead costs to a product transfers these costs from expenses to assets (inventory) on financial statements.

At A Glance