lOMoARcPSD|21238304

Backflush Costing

accountancy (University of Eastern Philippines)

Scan to open on Studocu

Studocu is not sponsored or endorsed by any college or university

Downloaded by Nonita Degorio ([email protected])
 lOMoARcPSD|21238304

Module in Backflush Costing

Backflush Costing

Backflush costing or backflushing is a shortcut approach to accounting for the flow of

manufacturing operations. Backflush costing refers to a variety of simplified cost
accumulation methods that tend to be used by companies that adopt JIT systems. Most
cost systems that include the backflush method are periodic inventory systems because
perpetual inventory records are eliminated.

Four Main Ways to Account for Manufacturing Costs at the End of the Period

1. Capitalize all manufacturing costs in the inventory as in full absorption costing. The
applicable cost of direct materials, direct labor, variable overhead and fixed
overhead are deferred in the ending inventory.

2. Capitalize only variable manufacturing costs in the inventory as in direct costing.

Only the applicable direct materials, direct labor and variable overhead are
deferred in ending inventory while fixed manufacturing costs are charged to
expense.

3. Capitalize only direct materials costs in inventory as in throughput costing. Only

the applicable direct materials costs are deferred in the ending inventory while all
conversion costs are charged to expense.

4. Expense all manufacturing costs. No manufacturing costs are deferred in the

inventory. This is the opposite of full absorption costing.

Backflush costing omits recording some or all of the journal entries relating to the stages
from the purchase of direct materials to the sale of finished goods. Since some stages
are omitted, the journal entries for a subsequent stage use normal or standard costs to
work backward to “flush out” the costs in the cycle for which journal entries were not
made.

In backflush systems, the usual inventory accounts are replaced with a simplified set of
accounts. Typically, the Materials and Work in Process accounts are combined into an
account referred to as Raw and in Process Inventory (RIPI) account. The payroll and
overhead accounts are replaced by a single account for Conversion Costs (other books
use the Cost of Goods Sold account for the cost of conversion). The other accounts in
1
Page

the system include the familiar Finished Goods and Cost of Goods Sold accounts.

For EVSU Accountancy Students Use Only

Downloaded by Nonita Degorio ([email protected])

 lOMoARcPSD|21238304

Module in Backflush Costing

During an accounting period, the purchases of direct materials, along with direct labor
and overhead costs are charged to the cost of goods sold account as incurred. The usual
entries are omitted including the entries to transfer the cost of goods manufactured from
one department to the next and ultimately to finished goods. The perpetual records are
not maintained. Instead, materials and conversion costs are charged directly to Cost of
Goods Sold. Then, at the end of the period, the remaining finished and partially completed
units are counted and inventory costs are charged in a backward direction from Cost of
Goods Sold to Finished Goods, RIPI and Conversion Cost accounts.

Essential Concepts in Backflush Costing

• Backflush costing is a streamlined cost accounting method that speeds up,

simplifies, and minimizes accounting effort in an environment that minimizes
inventory balances, requires few allocations, uses standard costs, and has a
minimal variance from standard.

• Backflush costing is used in companies with little or no inventory balances.

Products are typically produced only after an order has been placed.

• Often used by companies that has adopted a just-in-time (JIT) system regarding
inventory control.

• Backflush costing compliments JIT because it simplifies the costing of products. A

traditional costing system tracks cost as they are incurred, but backflush costing
delays recording of some cost information. It treats the detailed recording of
inventory data as a non-value-added activity.

• In backflush costing, the product costs are flushed out of the accounting system
and are attached to the products only after they are completed.

• Backflush costing is a costing system that focuses on output and works backward
through the system to allocate costs to cost of goods sold and inventory.

• It is designed to simplify accounting and save recordkeeping time and expense.

• Its purpose is to reduce the number of events that are measured and recorded in
the accounting system.
2
Page

For EVSU Accountancy Students Use Only

Downloaded by Nonita Degorio ([email protected])

 lOMoARcPSD|21238304

Module in Backflush Costing

• The main advantage to backflush costing is simplicity. A disadvantage is the

inability of the accounting system to pinpoint the uses of resources at each step of
the production process.

• Backflushing is an instance of accountants reducing non-value-adding costs by

reducing recordkeeping. Much of the analysis and work that management
accountants have performed in recordkeeping has to do with reducing the volume
of transactions by eliminating recording that is non-value-adding, while preserving
information needed for managing operations.

Features of Backflush Costing

• Work in process is usually eliminated. In JIT system, there may be no separate

materials inventory. Instead, materials received are put immediately into
production, so materials and work in process are combined in single account RIPI.

• Direct labor and factory overhead are expensed at the cost of goods sold account.
The estimated conversion cost components of the RIPI to FGI account balances
are adjusted at the end of each month with offsetting entry made to the COGS
account.

• Raw materials cost is backflushed from RIPI to FGI and from FGI to COGS based
on the monthly physical counts.

• Journal entries to inventory accounts may be delayed until the time of product
completion.

• Standard costs are used to assign costs to units when journal entries are made,
i.e., to flush costs backward to the point at which inventories remain.

Backflush Costing vs Traditional Costing

Traditional normal costing system uses sequential tracking, which is a costing system in
which recording of the journal entries occurs in the same order as actual purchases and
progress in production. Costs are tracked sequentially as products pass through each of
the following four stages:

Stage A Stage B Stage C Stage D

Purchase of Production Completion Sale of

Direct Resulting in of Finished
3

Materials Work in Production Goods

Page

Process of Goods

For EVSU Accountancy Students Use Only

Downloaded by Nonita Degorio ([email protected])

 lOMoARcPSD|21238304

Module in Backflush Costing

A sequential tracking costing system has four trigger points, corresponding to stages A,
B, C, and D. Trigger point refers to a stage in the cycle from the purchase of direct
materials (Stage A) to sale of finished goods (Stage D) at which journal entries are made
in the accounting system.

Backflush costing is a costing system that omits recording some of the journal entries
relating to stages from Stage A to Stage D. When journal entries for one or more stages
are omitted, the journal entry for a subsequent stage use normal costs to work backward
to “flush out” the costs in the cycle for which journal entries are not made. When
inventories are minimal, backflush costing simplifies the costing system without losing
much information as a result of simplification.

The following examples illustrate backflush costing. They differ in the number and
placement of trigger points:

Number of
Journal Entry Location in Cycle when Journal Entries are Made
Trigger Points
Example 1 3 Stage A: Purchase of direct materials
Stage C: Completion of production of goods
Stage D: Sale of finished goods
Example 2 2 Stage A: Purchase of direct materials
Stage D: Sale of finished goods
Example 3 2 Stage C: Completion of production of goods
Stage D: Sale of finished goods

In all three examples, there are no journal entries in the accounting system for work in
process (Stage B) because JIT production results in minimal work in process.

Hence, backflush costing differs from traditional costing with regard to the accounts used
and the timing of the cost recording. Specifically, three major differences exist. First,
instead of using separate accounts for RMI and WIPI, backflush costing combines these
into RIPI account. The rationale is that the amount of work in process at any particular
time will be low. Second difference is that since direct labor is usually a minor cost item
in a JIT setting, no separate account for DL in backflush costing is created. Rather, DL is
directly charged to COGS account. The third difference relates to the application of OH.
In backflush costing, OH is not applied to products until they are completed.
4
Page

For EVSU Accountancy Students Use Only

Downloaded by Nonita Degorio ([email protected])

 lOMoARcPSD|21238304

Module in Backflush Costing

Common Journal Entries

1. To record purchase of RM from suppliers:

Raw and in Process Inventory (RIPI) xxx

AP/Cash xxx

2. To record use of indirect materials:

FOH Control xxx

Supplies xxx

3. To record other FOH costs:

FOH Control xxx

Various accounts xxx

4. To record incurrence of DL and IL:

COGS xxx
FOH Control xxx
SWP/ Accrued Payroll xxx

5. To expense OH to COGS:

COGS xxx
FOH Control xxx

6. To backflush RM cost from RIPI to FGI:

FGI xxx
RIPI xxx

Material in RIPI beginning balance xxx

Material received from supplier xxx
Material in RIPI ending balance (xxx)
Amount to be backflushed from RIPI to FGI xxx
5
Page

For EVSU Accountancy Students Use Only

Downloaded by Nonita Degorio ([email protected])

 lOMoARcPSD|21238304

Module in Backflush Costing

7. To backflush material cost from FGI to COGS:

COGS xxx
FGI xxx

Material in FGI beginning balance xxx

Material backflushed from RIPI xxx
Material in FGI ending balance (xxx)
Amount to be backflushed from FGI to COGS xxx

8. Establish ending balances in inventory accounts by adjusting the conversion costs

components.

• Actual conversion costs may be underallocated or overallocated in an

accounting period.
• If a conversion cost component had decreased during the month, an
inventory account would be credited.
• If a conversion cost component had increased during the month, an
inventory account would be debited.

Demonstration Problem:

The following example shows one way to record events using a backflush costing system.

Beginning inventories None

Materials and components purchased and put into process P250,000
Labor and overhead costs incurred 180,000
Units completed 40,000
Units sold 35,000

Because materials are put into process almost immediately after being received,
backflushing factories do not need two separate accounts for materials and work in
process. They might record material purchases in the following manner:

RIPI 250,000
AP or Cash 250,000

Conversion costs are collected in a single account as follows:

6
Page

For EVSU Accountancy Students Use Only

Downloaded by Nonita Degorio ([email protected])

 lOMoARcPSD|21238304

Module in Backflush Costing

COGS 180,000
Various accounts 180,000

At the end of the period, the company records the cost of ending inventory of finished
units and the cost of units sold.

FGI 250,000
RIPI 250,000

COGS 218,750
FGI 218,750

An adjusting entry for conversion cost component of FGI will also be prepared to establish
the correct ending balance of FGI.

FGI 22,500
COGS 22,500

7
Page

For EVSU Accountancy Students Use Only

Downloaded by Nonita Degorio ([email protected])

 lOMoARcPSD|21238304

Module in Backflush Costing

PROBLEMS

Problem 1

ABC Company uses a raw and in process (RIP) inventory account and expenses all
conversion costs to the cost of goods sold account. At the end of each month, all
inventories are counted, their conversion cost components are estimated, and inventory
account balances are adjusted accordingly. Raw material cost is backflushed from RIP to
finished goods. The following information is for the month of June:

Beginning balance of RIP account, including P1,400

of conversion cost P31,000
Raw materials received on credit 367,000
Ending RIP inventory per physical count,
including P1,800 conversion cost estimate 33,000

Required: Compute the amount to be backflushed from RIP to Finished Goods.

Problem 2

XYZ Company produces only for customer order and most work is shipped within thirty-
six hours of the receipt of an order. XYZ uses a raw and in process (RIP) inventory
account and expenses all conversion costs to the cost of goods sold account. Work is
shipped immediately upon completion, so there is no finished goods account. At the end
of each month, inventory is counted, its conversion cost component is estimated, and the
RIP account balance is adjusted accordingly. Raw material cost is backflushed from RIP
to Cost of Goods Sold. The following information is for the month of August:

Beginning balance of RIP account, including P1,300

of conversion cost P12,300
Raw materials received on credit 246,000
Ending RIP inventory per physical count, including
P2,100 conversion cost estimate 12,100

Required:
a. Compute the amount to be backflushed from RIP to Cost of Goods Sold.
b. Compute the amount of Cost of Goods Sold after all transactions and adjustments
were made.
8
Page

For EVSU Accountancy Students Use Only

Downloaded by Nonita Degorio ([email protected])

 lOMoARcPSD|21238304

Module in Backflush Costing

Problem 3

The following transactions for March were provided for ABE Company which uses a JIT
costing system:
a. Raw materials were purchased, P97,000.
b. All materials purchased were requisitioned for production.
c. Direct labor costs of P77,000 were incurred.
d. Actual factory overhead costs amounted to P225,000.
e. Applied conversion costs totaled P300,000. This included P77,000 of direct labor.
f. All units were completed.

Required:
a. Compute the March 31 balance in the conversion cost.
b. Compute the March 31 balance in the Finished Goods account.

Problem 4

JCO Industries, which uses JIT system, has the following transactions for August:
a. Raw materials were purchased at the cost of P950,000.
b. All materials purchased were requisitioned for production.
c. Direct labor costs of P2,500,000 were incurred.
d. Actual factory overhead costs amounted to P6,000,000.
e. Applied conversion costs totaled P8,100,000. This included P2,500,000 of direct
labor.
f. All units were completed.

Required:
a. Compute the amount to be backflushed from RIP to Finished Goods.
b. Compute the amount of Finished Goods after all transactions have been
completed.
9
Page

For EVSU Accountancy Students Use Only

Downloaded by Nonita Degorio ([email protected])