backflush costing2

8/12/2019 BackFlush Costing2

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What is backflush costing?

It is an accounting system that applies costs to products

only when the production is complete.

It omits recording some or all of the journal entries relating

to the stages from the purchase of direct materials to the

sale of finished goods

It describes a costing system that delays recording some or allof the journal entries relating to the cycle from purchase ofdirect materials to the sale of finished goods.


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Special Considerations

It does not necessarily comply with GAAP

It does not leave a good audit trail the ability of theaccounting system to pinpoint the uses of resourcesat each step of the production process

However, inventory levels may be immaterial, negating

the necessity for compliance


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Types of Business using BC

makes the most sense for private

companies with just-in-time inventory

systems or those that use activity-based costing.

It does not leave a good audit trail the ability of theaccounting system to pinpoint the uses of resourcesat each step of the production process

best suited to companies that maintain low

inventories because costs then flow directly to

cost of goods sold.


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The process beginsfrom the Stage A i.e.

Purchase of DirectMaterial followed byStage B where in actualproduction starts andWork comes underprogress. FinishedGoods produced forms

Stage C followed bytheir sale i.e. Stage D.

Purchaseof DirectMaterial

Productionresulting inWIP

Completionof FinishedGoods

Sale ofFinishedGoods

The rocess


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ADVANTAGES

less entries have to be passed soit saves time. (major benefit)

less costly as less documentationhave to be maintained.

it uses JIT environment which savesholding cost of inventory.


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DISADVANTAGES

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

Another drawback is that detailed information formanagement purposes may not be available wher

needed, and the production control therefore need

to be all the stronger.


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DISADVANTAGES

The cost accounts used in back-flush accounting

may be more difficult to reconcile to financial

accounts needed for reporting

inability of the accounting system to pinpoint the

uses of resources at each step of the productionprocess.


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Speaker Technology, Inc., recently

introduced backflush costing and JIT.

Model AX27 Standard material cost: $14

Standard conversion cost: $21

Actual production for the month: 400 unitsActual materials purchased: $5,600

Actual conversion costs: $8,400

Backflush Costing Example


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Materials Inventory 5,600

Accounts Payable or Cash 5,600To record material purchases

Conversion Costs 8,400Accrued Wages 8,400

To record conversion costs incurred



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Finished Goods Inventory 14,000

Material Inventory 5,600

Conversion Costs 8,400To record costs of completed production

Cost of Goods Sold 14,000Finished Goods Inventory 14,000

To record costs of 400 units sold



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Cost of Goods Sold 14,000Material Inventory 5,600

Conversion Costs 8,400

The Finished Goods Account can be eliminated.


backflush costing2

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