Definition of Backflush Costing
Backflush costing is a traditional and standard costing systems track costs as products pass from raw materials, to work in progress, to finished goods, and finally to sales. Such systems are called ’sequential tracking systems’ because the accounting system entries occur in the same order as purchases and production. Sequential tracking is common where management desires to track direct material and labor time to individual operations and products.
Backflush costing is a method of costing a product that works backwards: standard costs are allocated to finished products on the basis of the output of a repetitive manufacturing process. Used where inventory is kept at minimum this method obviates the need for detailed cost tracking required in absorption costing, and usually eliminates separate accounting for work-in-process. It also called backflush accounting. Backflush costing is in the Accounting and Auditing and Industries, Manufacturing, and Technology subjects. It is also an accounting system in which costs are applied to products when production is completed.
Backflush accounting is a product costing approach, used in a Just-In-Time (JIT) operating environment, in which costing is delayed until goods are finished. Standard costs are then flushed backward through the system to assign costs to products. The result is that detailed tracking of costs is eliminated. Journal entries to inventory accounts may be delayed until the time of product completion or even the time of sale, and standard costs are used to assign costs to units when journal entries are made, that is, to flush costs backward to the points at which inventories remain. It can be argued that backflush accounting simplifies costing since it ignores both labor variances and work-in-progress. Backflush accounting is employed where the overall cycle time is relatively short and inventory levels are low.
The implementation of a just-in-time philosophy...
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