Basic Cost Flow Assumptions

Understanding the flow of costs from raw materials to work in process (WIP), then to finished goods, and finally to cost of goods sold (COGS) is vital for accurately tracking production costs and determining profitability. This flow represents the journey of costs through the manufacturing process, starting with the purchase of raw materials, which are then used in production. As these materials are transformed into products, their costs move into WIP inventory, capturing all costs involved during production. Once the goods are completed, their costs transfer to finished goods inventory, ready for sale. When the products are sold, the accumulated costs shift to COGS, impacting the income statement. 

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