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Cost flows for a manufacturing company starts with the idea that we are making inventory rather then just buying and selling inventory as we would in a merchandising company. As we make inventory we can track the cost of the material and the conversion of those material to finished inventory and finally to cost of goods sold. Material are first purchased. They are then transferred to production and this is reflected by a debit to the work in process account and a credit to materials. We then add the conversion costs of direct labor and overhead. The costs are then transferred to finished goods as the inventory in completed with a debit to finished goods and a credit to work in process. Finally the costs are moved and expensed in the form of cost of goods sold when the finished goods inventory is sold.
For more accounting information see accounting website.
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