BACKFLUSH COSTING

By:-139 Anadi Goel141 Abhishek Aggrawal142 Akarsh Sasanapuri143 Anmol Grover144 Ankit Bajpai175 Palak Mehra

What is Backflush costing?It is a cost accounting system which focuses on the outputof an organization and then works backwards to attributed Costs to stock and cost of sales.

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.

This system records the transaction only at the termination of the production and sales cycle.

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 very low, negatingthe necessity for compliance

Characteristics of using BCSimple accounting system No detailed tracking of DM and DL is required.

Each product has a set of standard cost

Companies having low material inventory becausecosts then flow directly to cost of goods sold.

The term trigger point refers to a stage in a cycle

going from purchase of direct materials to sale

of finished goods at which journal entries are

made in the accounting system.

Trigger Points

Purchase of Direct Material

Production resulting in WIP

Completion of Finished Goods

Sale of Finished Goods

The Process

A

BC D • Journal entries are made

at the trigger points A, C and D

• There were no opening stocks of raw materials, WIP or finished goods

• It should be assumed that there are no direct materials variance for the period.

Assume trigger points A, C, and D.This company would have two inventory accounts:

Type1. Combined materials

and materials in workin process inventory

2. Finished goods

Account Title1. Inventory:

Raw and In-processControl

2. Finished Goods Control

Trigger Points

Speaker Technology, Inc., recentlyintroduced backflush costing and JIT.Model AX27 Standard material cost: $14Standard conversion cost: $21

Actual production for the month: 400 unitsActual materials purchased: $5,600 Actual conversion costs: $8,400

Backflush Costing Example

Raw and In-process Material 5,600Accounts Payable or Cash 5,600

To record direct material purchases during the periodConversion Costs 8,400

Accrued Wages 8,400To record conversion costs incurred

Backflush Costing Example

Finished Goods Inventory 14,000Raw and In-process Material 5,600Conversion Costs 8,400

To record costs of completed production

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

To record costs of 400 units sold

Backflush Costing Example

Assume trigger points A and D.This company would have one inventory account:

TypeCombines direct materialsinventory and any direct

materials in work in processand finished goods inventories

Account Title

Inventory Control

Trigger Points

Cost of Goods Sold 14,000Material Inventory 5,600Conversion Costs 8,400

The Finished Goods Account can be eliminated.

Backflush Costing Example

ADVANTAGESLess 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.

DISADVANTAGESOne of the main disadvantages of the system is that it only works under some strict requirements. If not met, the system will become unbalanced and difficult to maintain

Another drawback is that detailed information for management purposes may not be available where needed. Therefore production control needs to be stronger.

DISADVANTAGESThe 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.