The Flow of Costs

Accounting cycle in cost accounting is the same as that in financial accounting only with a little more detail. Cost accounting consists of a system which is more detailed and precise in recording and measurement of cost elements.

Cost flows in the cost accounting system in the exact same way in which production process moves in a factory.

Starting point is the purchase of materials for production. When materials are purchased, they are held in the materials inventory account. When materials are required in the manufacturing process, they are transferred from materials inventory account to work in process inventory account. Labor and manufacturing overheads are added at this stage. As soon as the production process is completed, goods produced are transferred from work in process inventory to finished goods inventory. When goods are sold, finished goods move to the income statement as cost of goods sold.

The Flow of Costs – Flow Chart