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.