Backflush costing is an accounting system that delays recording journal entries related to the production process until completion of finished goods. It omits recording costs at each stage from purchasing materials through production and instead assigns total costs to finished goods inventory once production is finished. While it simplifies the accounting process and is suited for just-in-time inventory systems, backflush costing may not be compliant with GAAP and does not provide a clear audit trail of resource usage throughout production. It is best for companies with low inventories where costs can flow directly to cost of goods sold.
Backflush costing is an accounting system that delays recording journal entries related to the production process until completion of finished goods. It omits recording costs at each stage from purchasing materials through production and instead assigns total costs to finished goods inventory once production is finished. While it simplifies the accounting process and is suited for just-in-time inventory systems, backflush costing may not be compliant with GAAP and does not provide a clear audit trail of resource usage throughout production. It is best for companies with low inventories where costs can flow directly to cost of goods sold.
Backflush costing is an accounting system that delays recording journal entries related to the production process until completion of finished goods. It omits recording costs at each stage from purchasing materials through production and instead assigns total costs to finished goods inventory once production is finished. While it simplifies the accounting process and is suited for just-in-time inventory systems, backflush costing may not be compliant with GAAP and does not provide a clear audit trail of resource usage throughout production. It is best for companies with low inventories where costs can flow directly to cost of goods sold.
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 all of the journal entries relating to the cycle from purchase of direct materials to the sale of finished goods. Special Considerations It does not necessarily comply with GAAP It does not leave a good audit trail the ability of the accounting system to pinpoint the uses of resources at each step of the production process However, inventory levels may be immaterial, negating the necessity for compliance 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 the accounting system to pinpoint the uses of resources at each step of the production process best suited to companies that maintain low inventories because costs then flow directly to cost of goods sold.
The process begins from the Stage A i.e. Purchase of Direct Material followed by Stage B where in actual production starts and Work comes under progress. Finished Goods produced forms Stage C followed by their sale i.e. Stage D. Purchase of Direct Material Production resulting in WIP Completion of Finished Goods Sale of Finished Goods ADVANTAGES less entries have to be passed so it saves time. (major benefit) less costly as less documentation have to be maintained. it uses JIT environment which saves holding cost of inventory. 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 for management purposes may not be available where needed, and the production control therefore need to be all the stronger. 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 production process. 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 units Actual materials purchased: $5,600 Actual conversion costs: $8,400 Backflush Costing Example Materials Inventory 5,600 Accounts Payable or Cash 5,600 To record material purchases Conversion Costs 8,400 Accrued Wages 8,400 To record conversion costs incurred Backflush Costing Example Finished Goods Inventory 14,000 Material Inventory 5,600 Conversion Costs 8,400 To record costs of completed production Cost of Goods Sold 14,000 Finished Goods Inventory 14,000 To record costs of 400 units sold Backflush Costing Example Cost of Goods Sold 14,000 Material Inventory 5,600 Conversion Costs 8,400 The Finished Goods Account can be eliminated. Backflush Costing Example