Backflush Costing

By Group -- 5
 What is Backflush Costing?

“Backflush Costing is a method that

works backward from the output to
assign manufacturing costs to work-
in-progress and inventories”
 Some key Points
 The term ‘Backflush’ is used because costs are
flushed back through the production process to
the point at which inventories remain

 Backflush Costing avoids detailed accounting

transactions as, no separate accounts are
maintained for work-in-progress in blackflush
accounting.

 In Backflush Costing, first focus, is on the output

of the organization and work backwards to
allocate costs between costs of goods sold and
inventories.
 Traditional Costing
“Traditional normal and standard
costing systems use sequential
tracking. Under sequential tracking,
recording of journal entries follows
the same order in which the four
stages of purchases of material,
work-in-process, finished goods and
sales take place.”
 Comparison
Backflush Costing Traditional Costing
The Process
The process begins
from the Stage A i.e.
Purchase of Direct
Material followed by
Stage B where in
actual production
starts and Work comes
under progress.
Finished Goods
produced forms Stage
C followed by their sale
i.e. Stage D.
Thus We Can Say;
How Can Backflush Costing Help ?

“Back flush costing can simplify

traditional job costing systems
by not recording journal entries
for work-in-process, purchase of
raw material or production of
finished goods”
How does it works?
Costs Flow Through T
Accounts
Direct materials costs are charged directly
to the Cost of Goods Sold account

Direct labor and manufacturing overhead

costs are combined in the Conversion
Costs account and transferred to the Cost
of Goods Sold account

Once all product costs for the period have

been entered into the Cost of Goods Sold
account, calculate the amounts to transfer
back to the inventory accounts
 Calculating amounts transferred
back to Inventory Account
 Finished Goods  Work in Process
Inventory account Inventory account

 Difference between  Amount charged to

the cost of units the Cost of Goods
sold and the cost of Sold account during
completed units the period less the
actual cost of goods
finished during the
period
Journal Entries
Particulars Dr/Cr Amoun
t
Inventory: Material and In Process Dr. XXX
Control
ConversionTocosts
Accounts Payable Control
control Dr. XXX
To Various Accounts
(such as Wages Payable)
Finished Goods Control Dr. XXX
To Inventory: Material
& In Process Control
To Conversion costs
allocated
Journal Entries Cont…
Particulars Dr/Cr Amoun
t
Cost of goods Sold Dr. XXX
To Finished goods control
Conversion Costs allocated Dr. XXX
(Cost of goods sold)
To Conversion costs control
 Reasons for using Backflush Costing

 To remove the incentive for

managers to produce for inventory.

 To get managers more focused on

selling units.
THANK
YOU !!!