Backflush Costing

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.

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.

The Backflush costing as a method is concerned or associated with a just-in-time or JIT operation. The main goal is to keep the inventory of raw materials low. Therefore the orders for raw materials are scheduled so that the goods arrive just before the production commences. By the time materials invoices are received, the goods are produced, costs are calculated, and the products are sold at a rate that covers the expenses. All the recordings in the company’s accounting books are made at that point and the books are kept balanced and factual without making multiple postings all through the production process.

There are two drawbacks of this costing method. The Backflush costing is a concept that is not widely considered to be in compliance with generally accepted accounting principles. It also lacks the sequential audit trail.

Questions

• What is a Backflush costing method?
• How is this method associated with JIT?