By:139

141
142
143
144
175

Anadi Goel
Abhishek Aggrawal
Akarsh Sasanapuri
Anmol Grover
Ankit Bajpai
Palak Mehra

What is Backflush costing?

It is a cost accounting system which focuses on the output
of 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 all
of the journal entries relating to the cycle from purchase of
direct 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
However, inventory levels may be very low, negating
the necessity for compliance
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

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

Each product has a set of standard cost

Companies having low material inventory because

costs then flow directly to cost of goods sold.

Trigger Points

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.

The Process

C
B

D
Sale of
Finished
Completion Goods

Production of Finished
resulting
Goods
in WIP

A
Purchase
of Direct
Material

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.

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

Type
Account Title
1. Combined materials
1. Inventory:
and materials in work
Raw and In-process
in process inventory
Control
2. Finished goods
2. Finished Goods Control

Backflush Costing Example

Speaker Technology, Inc., recently
introduced backflush costing and JIT.
Model AX27 Standard material cost: $14
Standard conversion cost:
$21
Actual production for the month:
Actual materials purchased:
Actual conversion costs:

400 units
$5,600
$8,400

Backflush Costing Example

Raw and In-process Material

5,600
Accounts Payable or Cash
5,600
To record direct material purchases during
the period
Conversion Costs
8,400
Accrued Wages
8,400
To record conversion costs incurred

Backflush Costing Example

Finished Goods Inventory
14,000
Raw and In-process Material
5,600
Conversion Costs
8,400
To record costs of completed production
Cost of Goods Sold
Finished Goods Inventory
To record costs of 400 units sold

14,000
14,000

Trigger Points
Assume trigger points A and D.
This company would have one inventory account:
Type
Combines direct materials
inventory and any direct
materials in work in process
and finished goods inventories

Account Title
Inventory Control

Backflush Costing Example

The Finished Goods Account can be eliminated.
Cost of Goods Sold
Material Inventory
Conversion Costs

14,000
5,600
8,400

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 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.

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.