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.



RELATED TERMS
  1. LIFO Reserve

    The difference between the FIFO and LIFO cost of inventory for ...
  2. First In, First Out - FIFO

    An asset-management and valuation method in which the assets ...
  3. LIFO Liquidation

    When a company using the LIFO (Last In, First Out) method of ...
  4. Last In, First Out - LIFO

    An asset-management and valuation method that assumes that assets ...
  5. Average Cost Flow Assumption

    A calculation used by companies to monitor inventory goods. The ...
  6. Dollar-Value LIFO

    An accounting method used for inventory that follows the last ...
Related Articles
  1. Investing

    When & Why Should a Company Use LIFO

    By using LIFO (last in, first out) when prices are rising, companies reduce their taxes and also better match revenues to their latest costs.
  2. Investing

    Why Last In First Out Is Banned Under IFRS (XOM)

    We explain why Last-In-First-Out is banned under IFRS
  3. Investing

    Inventory Valuation For Investors: FIFO And LIFO

    We go over these methods of calculating this component of the balance sheet, and how the choice affects the bottom line.
  4. Investing

    Inventory: FIFO, LIFO

    Whether a company chooses FIFO or LIFO has important implications for the bottom line and for tax liability.
  5. Investing

    How to Analyze a Company's Inventory

    Discover how to analyze a company's inventory by understanding different types of inventory and doing a quantitative and qualitative assessment of inventory.
  6. Small Business

    Build Your Small Business During Downswings

    Here we offer some cost-saving measures to strengthen your business even when the market is weak.
  7. Investing

    Explaining Carrying Cost of Inventory

    The carrying cost of inventory is the cost a business pays for holding goods in stock.
  8. Investing

    What Are The Different Types Of Costs In Cost Accounting?

    Cost accounting measures several different types of costs associated with a company’s production processes.
  9. Small Business

    Understanding First In, First Out (FIFO)

    A company that uses the first in, first out inventory valuation method will sell, use, or dispose of assets that it produced or acquired first.
  10. Managing Wealth

    Cost Basis Basics

    The term "cost basis" refers to the original value of a security you own. When you sell a stock, bond or mutual fund, you use the cost basis to determine your profit or loss, which in turn affects ...
RELATED FAQS
  1. Does US GAAP prefer FIFO or LIFO accounting?

    Investigate the use of LIFO and FIFO inventory accounting methods under U.S. GAAP, and learn why there is pressure from some ... Read Answer >>
  2. What are the business consequences of using FIFO vs. LIFO accounting methods?

    Learn about the real business consequences from using a first-in, first out inventory accounting method versus a last-in, ... Read Answer >>
  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?

    Learn how the FIFO accounting method differs from the LIFO method and the primary disadvantages for a company using the FIFO ... Read Answer >>
  5. If during a period of rising prices, a LIFO liquidation occurs ...

    The correct answer is: b) Remember that LIFO transmits the latest prices of inventory over to cost. Therefore, what's left ... Read Answer >>
  6. How does inventory accounting differ between GAAP and IFRS?

    Learn about inventory costing differences between generally accepted accounting principles, or GAAP, and International Financial ... Read Answer >>
Hot Definitions
  1. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  2. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  3. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  4. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  5. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  6. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
Trading Center