Perpetual cost flow

Perpetual cost flow method is used to provide relevant information to management on a timely basis to aid in planning and control decisions. The main objective of the perpetual cost flow, as with the case with periodic cost accumulation systems, is the accumulation of total costs and the computation of unit costs. The perpetual cost flow method refers to an accounting method of maintaining up-to-date property records that accurately reflect the level of goods on hand. The count of goods on hand is maintained at all times. The modern information systems in a company facilitate detailed perpetual cost tracking for those goods.

In a perpetual cost flow method, the cost of direct materials, direct labor, and factory overhead must first flow through work-in-process inventory in order to reach finished goods inventory. Next the total costs transferred from work-in-process inventory to finished goods inventory during the period equal to cost of goods manufactured. The finishing work-in-process inventory is the balance of un-finished production at the end of the period. When the goods are sold, the cost of the goods sold is transferred from the asset account Finished Goods Inventory to the expense account of Cost of Goods Sold. The ending inventory is the balance of unsold production at the end of the period. The total expenses of the company equals to the cost of goods sold plus selling, general, and administrative expenses.

The current balance of inventory under the perpetual cost flow method is sustained daily by the addition of inventory to the account when goods are received and the deduction from the account when they are used. The perpetual cost flow method is opposed to a yearly or monthly calculation, allows for a company to have more timely and accurate data on inventories. For the FIFO method perpetual method is applied at the time of sale.

Questions

• What is perpetual cost flow method?
• What is the procedure applied by the companies in the perpetual cost flow method?