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You are watching: Which of the following describes the flow of product costs in a manufacturing company?
David Kindness is a Certified Public Accountant (CPA) and also an professional in the areas of financial accounting, corporate and also individual tax planning and preparation, and investing and also retirement planning. David has aided countless clients enhance their accountancy and financial units, create budgets, and also minimize their taxes.
What Is Flow of Costs?
Flow of prices describes the manner or route in which expenses move through a firm. Generally, the circulation of costs is appropriate through manufacturing carriers by which accountants should quantify what prices are in raw materials, work in process, finished items inventory, and expense of items marketed.
Flow of expenses applies not only to inventory however also to factors in various other procedures to which a price is attached, such as labor and overhead.
Understanding Flow of Costs
The procedure of the circulation of expenses begins through valuing the raw materials provided in manufacturing. The circulation of costs then moves to the work-in-process inventory. The expense of the machinery and labor connected in manufacturing are included and also any kind of overhead prices. The flow of costs following moves to the inventory phase wright here the finimelted products are stored till they"re sold. Following the sale of the products, the flow of expenses ultimately moves to cost of goods offered.
Tbelow are numerous approaches for accountancy for the circulation of costs. These include LIFO (last in, first out), FIFO (first in, initially out), certain identification, and weighted-average expense. For example, the expenses of raw materials can vary over time, by which some are higher in price than others. After the items are offered, the firm must account for the price of products offered by removing the items from inventory to COGS.
Under the FIFO method, the first raw product purchased would be relocated from inventory and charged to COGS as an expense. Conversely, if the agency offered the LIFO approach, the last unit of raw materials purchased would be moved from inventory and charged to COGS as an cost.
In various other words, through the LIFO strategy, the earliest raw products are preserved or taped in inventory much longer while FIFO leaves the recently purchased materials in inventory. Companies need to use the same expense flow calculations and assumptions.
U.S. GAAP (generally embraced bookkeeping principles) financial reporting standards require that providers that usage the LIFO technique report the distinction in between that strategy and also FIFO in a line item called LIFO reserve. This enables analysts to readily compare firms making use of different cost circulation assumptions.
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Example of Flow of Costs
For example, Ford Motor Company kind of produces cars and also trucks. The agency hregarding purchase raw items to manufacture the cars it sells, which marks the begin of the price of auto production. Next, there are the prices to pay employees to run the assembly line, which adds on to the cost of the raw materials. The expense to run the machines and the costs linked through the structure wright here the machines are located are additionally accounted for in the circulation of costs.