What Is Backflush Costing (Backflush Accounting)? Backflush costing is an accounting method that involves the process of assigning costs to products after the production process is complete. Also referred to as backflush accounting, this method comes into play when a company works backward to set the final price of the manufactured goods. How Does Backflush Costing Work? When the production process starts, the company orders all the raw materials required to make its product. In the basic costing process, a journal entry is passed every time a raw material is ordered, but in backflush costing, no journal entry is made throughout the process. The raw material, labor, utility and all other expenses are calculated after the production process is completed. This final journal entry is then used to assign a standard cost to the product. It enables the company to simplify its bookkeeping process and save time. Where Can Backflush Costing Be Used? Backflush costing is very hard to implement. Every company is not eligible to carry out the complex process. For a successful implementation, a diligent and expert team is required. Shorter Manufacturing Period: Backflush costing is suitable for products with a shorter manufacturing time. This makes the bookkeeping process easier for accountants. With a longer process, numerous variables get involved, an accurate price is not assigned, and the difference between the standard and actual costs varies by a more significant margin. Un-customized Products: Backflush costing is not suitable to be used by companies offering customized products. The standard cost for each product would be different and need to be calculated separately, making the process lengthy. Just-in-Time Inventory System: Backflush costing works best for JIT Inventory management systems where inventory is minimized. Materials are ordered only when needed, making it easier to keep track of the inventory for a single entry. Advantages and Disadvantages of Backflush Costing Backflush costing is a time-efficient accounting procedure. It saves the time involved in tracking all expenses during the production process by introducing the single entry method. It also supports a low inventory system and saves up storage costs making it cost-efficient. With all its benefits, backflush costing comes with its drawbacks too. First, it is a complex method to implement, and any wrong step leads to the company losing money. Second, the single entry system makes it nearly impossible to conduct an audit as it requires proof of each transaction. Such a company is also found not to be following the generally accepted accounting principles (GAAP), which may cause problems with potential investors.
February 20, 2023