Definition of Backflush Costing :
A streamlined cost accounting method that speeds up, simplifies, and reduces accounting effort in an environment that minimizes inventory balances, requires few allocations, uses standard costs, and has minimal variances from standard
Product costing approach, used in a just - intime (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. The system is best suited to companies that maintain low inventories because costs then flow directly to cost of goods sold. Work-in-process is usually 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.
Characteristics Of Companies Adopting Backflush Costing :
The companies adopting backflush costing often meet the following three conditions :
1. Management wants a simple accounting system and no detailed tracking of direct material and direct labour through a series of operations is required.
2. Each product has a set of standard cost.
3. Material inventory levels are either low or constant.
If inventories are low, the bulk of manufacturing costs will flow into costs of goods sold and it is not deferred as inventory cost. Backflush costing is especially attractive in companies that have low inventories resulting from JIT.
What are the advantages of Backflush Costing :
1. Less entries have to be passed so it saves time. (major benefit)
2. Less costly as less documentation have to be maintained.
3. It uses JIT environment which saves holding cost of inventory
What are the disadvantages of Backflush Accounting :
1. One of the main disadvantages of the system is that it only works under some quite strict requirements. If these are not met, the system will become unbalanced and may be quite unusable, or a nightmare to maintain:
2. Standard costs must be reliably estimated and variances kept to a minimum The premise of the system is that a sale triggers the manufacturing process, therefore Buildup of work in progress or finished goods needs to be avoided
3. Another drawback is that detailed information for management purposes may not be available where needed, and the production control therefore need to be all the stronger.
4. The cost accounts used in back-flush accounting may be more difficult to reconcile to financial accounts needed for reporting
Uses of backflush costing in Cost Accounting :
1. Backflush costing is defined as a streamlined cost accounting method that speeds up, simplifies, and reduces accounting effort in an environment that minimizes inventory balances, requires few allocations, uses standard costs, and has minimal variances from standard. Therefore there is a delay in the costing process until the production of goods or services is completed. Under this costing method records purchases of raw material and accumulates actual conversion costs. At a predetermined trigger point such as at the completion of production or on the sale of goods, an entry is made to allocate the total costs incurred to cost of goods sold and to finished goods inventory using standard production costs.
2. The Backflush costing is a method of costing a product that works backwards i.e. the standard costs is allocated to finished products on the basis of the output of a repetitive manufacturing process. Used where inventory is kept at minimum. This method necessitates the need for detailed cost tracking required in absorption costing, and usually eliminates separate accounting for work-in-process. It is also known as Backflush accounting.
3. The Backflush costing...