Costflow

Costflow refers to the movement and allocation of costs as they travel through a business’s operations, from inputs such as materials and labor to the final recording as cost of goods sold. It covers how direct and indirect costs are assigned to products or services as they pass through stages of production, inventory, and delivery, and how those costs are reflected in financial statements.

In inventory accounting, costflow depends on the chosen cost flow assumption, which determines how costs are assigned to units sold and the valuation of remaining inventory. Common methods include first-in, first-out (FIFO), last-in, first-out (LIFO), and average cost. The physical progression of materials typically goes from raw materials to work in progress to finished goods, with overhead allocated to product costs along the way. The selected method influences reported gross margin, inventory value, and taxable income.

Two broad costing approaches shape costflow: process costing and job costing. Process costing applies to continuous or homogeneous production, allocating costs evenly across units produced. Job costing traces costs to specific jobs or projects, assigning direct materials, direct labor, and overhead to each job. In both approaches, costs are accumulated and transferred through inventory accounts and into cost of goods sold when goods are sold.

Systems and practices support costflow through enterprise resource planning and cost-management tools, enabling budgeting, pricing, profitability analysis, and regulatory reporting. Costflow information informs pricing decisions, product mix, capital investments, and performance measurement, while requiring careful application to ensure accuracy, consistency, and disclosure where methods change. See also cost accounting, inventory management, and overhead allocation.