Backflush Costing

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Acknowledgment

I have taken efforts in this project. However, it would not have been possible without the kind support and help of many individuals and the organization. I would like to extend my sincere thanks to all of them. I am highly indebted to the Institute of Business Management for its guidance and for providing necessary information regarding the project & also for their support in completing the project. I would like to express my gratitude towards my parents and my teachers for their kind co-operation and encouragement which help me in completion of this project. My thanks and appreciations also go to my colleague in helping with the project and other people who have willingly helped me out with their abilities.

Contents

Introduction

Back flush accounting is one of the accounting systems that support Just in Time system. Just in time is the inventory system that produced the required items at the right time and the right place. Accounting was delay the recording of transaction during process is known as back flush accounting. The system is the transaction was only recorded once the product was completed. Back flush accounting is the system that focuses on the output of organization and then work backwards when allocating costs between costs of goods sold and inventories, with no separate accounting for work in progress. According to ACCA article, in back flush accounting costs are not associated with units until they are completed or sold. Back flush accounting is also called delayed costing, as costs are not allocated to production until after events have occurred. From view by other author, back flush accounting is a costing system that omits recording some of all of the journal entries relating to the cycle from purchase of direct materials to the sales of finished goods (Robert, 2011). According to Grahame Steven, Financial Management 2006, an approach called back flush accounting has been developed to meet the requirement of JIT manufacturing which on it is not a sequential tracking system and does not account for individual transaction. Back flush accounting meshes well with Just-In-Time production system because, according to the Tax Shield Education, both Just-In-Time production and the process of back flush accounting work backward to account for cost incurred during the production process, but it does require accurate bills and records as well as controlled production yields, according to the Federal Accounting Standards Advisory Board (FASAB).Theoretically, the usual inventory accounts in back flush accounting are replaced with a simplified set of accounts such as Materials and Work in Process account are combined into an account referred as Raw and in Process (RIP).

Schematic Diagram of Back Flush Costing

Basic characteristics of Back flush costing as shown in Figure are the following (Mc Watters et al. 2001, p. 438):
One raw materials and in-process materials inventory account (RIP) is used. No separate work-in-process account exists, and work-in-process tracking is eliminated. Raw materials and purchased parts issued to production are charged to RIP. One account for labor and overhead costs (conversion costs) exists for each JIT flow line. Material costs are charged directly to products.

Conversion costs are assigned based on machine or throughput time directly to the finished goods inventory account (FG). When units are completed, RIP is reduced by material costs, and FG is charged for the materials.

Issues with Back Flush Costing

Back flush accounting is subject to the following problems:
Requires an accurate production count
The number of finished goods produced is the multiplier in the back flush equation, so an incorrect count will relieve an incorrect amount of components and raw materials from stock. Requires an accurate bill of materials

The bill of...
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