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    University of San Carlos: School of Business and Economics

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    Venn Bacus Rabadon
    This document discusses backflush costing, which is a product costing approach used in Just-in-Time environments. [1] It delays costing until goods are finished, then flushes standard costs backward through the system to assign costs to products. [2] This eliminates detailed cost tracking. [3] Backflush costing works best for private companies with JIT inventory systems or those using activity-based costing, as it is not consistent with GAAP and does not leave a good audit trail.

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    University of San Carlos: School of Business and Economics

    Uploaded by

    Venn Bacus Rabadon
    29 views3 pages
    This document discusses backflush costing, which is a product costing approach used in Just-in-Time environments. [1] It delays costing until goods are finished, then flushes standard costs backward through the system to assign costs to products. [2] This eliminates detailed cost tracking. [3] Backflush costing works best for private companies with JIT inventory systems or those using activity-based costing, as it is not consistent with GAAP and does not leave a good audit trail.

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    This document discusses backflush costing, which is a product costing approach used in Just-in-Time environments. [1] It delays costing until goods are finished, then flushes standard costs backward through the system to assign costs to products. [2] This eliminates detailed cost tracking. [3] Backflush costing works best for private companies with JIT inventory systems or those using activity-based costing, as it is not consistent with GAAP and does not leave a good audit trail.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    29 views3 pages

    University of San Carlos: School of Business and Economics

    Uploaded by

    Venn Bacus Rabadon
    This document discusses backflush costing, which is a product costing approach used in Just-in-Time environments. [1] It delays costing until goods are finished, then flushes standard costs backward through the system to assign costs to products. [2] This eliminates detailed cost tracking. [3] Backflush costing works best for private companies with JIT inventory systems or those using activity-based costing, as it is not consistent with GAAP and does not leave a good audit trail.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    University of San Carlos

    Downtown Campus
    P. Del Rosario Street, Kamagayan, Cebu City


    School of Business and Economics

    AC512
    Cost Accounting Part 2

    Backflush Costing




    Submitted by:
    Cornejo, Sue Cleo
    Imperial, Sheena
    Pedroza, Pia Loraine
    Rodrigo, Karla Angela Therese
    Yutico, Roxane Mae


    Submitted to:
    Oscar Villaflor
    Backflush Costing

    What is Backflush Costing?
    Backflush accounting is a product costing approach, used in a Just-In-Time (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. 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.
    It is a method of costing a product that works backwards: standard costs are allocated to
    finished products on the basis of the output of a repetitive manufacturing process. Used where
    inventory is kept at minimum this method obviates the need for detailed cost tracking required in
    absorption costing, and usually eliminates separate accounting for work-in-process. It also called
    backflush accounting.

    Special Consideration
    Backflush costing does not necessarily comply with GAAP
    However, inventory levels may be immaterial, negating the necessity for
    compliance
    Backflush costing 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

    Types of Business using Backflush Costing
    Backflush costing makes the most sense for private companies with just-in-time
    inventory systems or those that use activity-based costing. As mentioned above, backflush
    costing is not consistent with GAAP and cannot be used by public companies that are subjected
    to strict reporting requirements. Companies that must be audited, either internally or by
    independent third-party auditors, may not be able to use backflush costing because it does not
    leave much of an audit trail. It is not possible to report an accurate inventory value at most points
    in the production process. If the inventory cycle is long, backflush costing will greatly
    undervalue the inventory during most of the year. When the products are finally sold, the
    backflush of costs can make a product that seemed profitable into a money loser for the
    company.
    Trigger Points of Backflush Costing
    Trigger point refers to a stage in the cycle from purchase of direct materials (stage-1) to sale of
    finished goods (stage-4)
    Stage-1 Stage-2 Stage-3 Stage-4
    Traditional Purchase Production Completion Sale of
    Trigger of Direct of Work in of a Good Finished
    Points Materials Progress Finished Units Units

    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:

    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

    Another drawback is that detailed information for management purposes may not be
    available where needed, and the production control therefore needs to be all the stronger.
    The cost accounts used in back-flush accounting may be more difficult to reconcile to
    financial accounts needed for reporting

    There are some drawbacks to using the backflush costing method of accounting for
    inventory. By eliminating the work-in-process account, backflush costing may produce a more
    accurate view of a particular company's inventory, but this difference often makes the method go
    against generally accepted accounting principles (GAAP). The main concern is that inventory is
    undervalued during some phases of production because there is no work-in-process account to
    catch those costs.

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