Product Cost Flow through the General Ledger

Garrison, Noreen, and Brewer's Managerial Accounting shows the flow of costs, along with the related journal entries, in Chapter 3. At this time, we will just cover the logic of the flow.

An important precedent to understanding accounting is to understand that accounting is simply keeping records to show what resources went through the organization. That is, the physical flow of goods and services into and out of the organization requires recognition in the accounting records. 

For a manufacturing company, raw materials are acquired for use in production. On the books these will go into a raw materials inventory account until they are used.

These raw materials are sent into the factory where direct labor (the labor cost of those who actually build the product) and manufacturing overhead (all of the costs of running the factory other than direct materials and direct labor) are added. On the books these costs are accumulated in a work-in-process inventory account.

The completed production is transferred to an area where the product awaits sell and delivery to customers. On the books, a transfer is made out of work-in-process inventory and into finished goods inventory.

As the goods are sold, they are transferred out of the finished goods inventory and into cost of goods sold, an expense account.

The exhibits in the textbook only reflect the flow of costs. Of course, as the goods are sold there is also an entry to record the revenue from the sale, which is not reflected in the exhibits.

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