Flow Of Costs

DEFINITION of 'Flow Of Costs'

Refers to the manner in which costs move through a firm. Typically, the flow of costs is relevant to a manufacturing environment where accountants must quantify what costs are in raw materials, work in process, finished goods inventory and cost of goods sold. Flow of costs does not only apply to inventory, but also to factors in other processes to which a cost is attached such as labor and overhead.

BREAKING DOWN 'Flow Of Costs'

There are several methods for accounting for the flow of costs. These include LIFO (last in, first out), FIFO (first in, first out), specific identification and weighted-average cost. U.S. GAAP financial reporting standards require that companies that use the LIFO method report the difference between that method and FIFO in a line item called LIFO reserve. This allows analysts to readily compare firms using different cost flow assumptions.



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RELATED FAQS
  1. Does US GAAP prefer FIFO or LIFO accounting?

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  2. What are the business consequences of using FIFO vs. LIFO accounting methods?

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  3. What's the difference between weighted average accounting and FIFO/LILO accounting ...

    The main difference between weighted average cost accounting, LIFO, and FIFO methods of accounting is the difference in which ... Read Answer >>
  4. What are the disadvantages of the FIFO accounting method?

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  5. If during a period of rising prices, a LIFO liquidation occurs ...

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