Scribd
Upload
25 views6 pages

Backflush Costing Method

Uploaded by

Justin MUNYAMAHORO
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
25 views6 pages

Backflush Costing Method

Uploaded by

Justin MUNYAMAHORO
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 6

Backflush Costing Method

Backflush costing is a simplified costing system used in a just-in-time


production philosophy. It allocates costs between the cost of goods sold
and inventories, with no separate accounting for work in progress.

By David Akoto
Just-in-time Production Philosophy
Definition History Benefits

Production system where Introduced in the early JIT helps reduce the cost of
needed materials and 1970s by Toyota and later holding inventory, waste,
goods are delivered just in adopted by many other and rework while
time before they are organizations. JIT has improving efficiency and
needed in the become a popular quality. It also promotes
manufacturing process. approach to production better relationships with
This approach seeks to because of its many suppliers.
minimize inventory costs advantages, including
and improve efficiency. improved quality and
reduced waste.
Principles of Backflush Costing

Focus on Output No Separate Accounting for Allocation of Cost


Work in Progress
Backflush costing starts with When allocating cost between
the output of the organization A key feature of backflush cost of goods sold and
and then works backwards costing is that no separate inventories, the focus is on the
when allocating costs. It accounting is done for work in output. Costs are allocated to
focuses on what has been progress. This simplifies the the inventory based on the
achieved rather than the accounting process and extent to which the inventory
process used to achieve it. reduces the cost of records has absorbed the company's
keeping. production costs.
Allocation of Cost between Cost of
Goods Sold and Inventories
1 Cost flow 2 Inventory accounting

Backflush costing allocates When allocating costs,


costs to the inventory account backflush costing uses a
when goods are produced. predetermined inventory
When goods are sold, the costs account based on standard
are then transferred to the cost costs or moving average costs.
of goods sold account.

3 Reconciliation

At the end of each period, a reconciliation process is undertaken to adjust


the inventory account balance according to the actual cost of inventory and
to update the cost of goods sold account balance.
Benefits and Limitations of Using Backflush
Costing Method

1 Benefits

The benefits of backflush costing


include simplification of the cost
Limitations 2 accounting process, increased
The limitations of backflush costing accuracy, and cost savings.
include the need for accurate
inventory control systems, the
reduction of information regarding 3 Real World Example
work in progress, and its sole focus on
output rather than process. Suppose Intermediate. MN uses a JIT
system and backflush accounting.
During April, 1000 units were
produced and sold. The standard cost
per unit is £100: this includes materials
of £45. During April, £60 000 of
conversion costs were incurred. The
debit balance on the cost of goods
sold account for April was £105 000.
Conclusion and Key Takeaways
Conclusion Key Takeaways
Backflush costing is a simplified costing system • Simple but effective costing approach for JIT
that focuses on the output of the organization to
• Focus on output rather than process
allocate costs between cost of goods sold and
• No separate accounting for work in progress
inventories. When applied with JIT, it has many
benefits. • Cost savings and increased efficiency

You might also like