Backflush Costing
What Is Backflush Costing?
Backflush costing is a product costing system generally utilized in a just-in-time (JIT) inventory system. In short, an accounting method records the costs associated with producing a decent or service solely after they are created, completed, or sold. Backflush costing is additionally generally alluded to as backflush accounting.
How Backflush Costing Works
"Flushing" costs to the furthest limit of the production run eliminates the itemized tracking of expenses, for example, raw material and labor costs, all through the manufacturing system, which is a feature of traditional costing systems. This allows the company to work on its expense tracking processes, hence saving accounting and cycle costs, yet it might likewise limit the detail of information that the company retains connected with individual costs for production and sales.
The total costs of a production run are recorded at the same time, toward the finish of the interaction. Companies using backflush costing, in this manner, basically work backward, calculating the costs of products after they're sold, finished, or delivered. To do this, businesses assign standard charges to the goods they produce. Sometimes costs vary, so companies in the long run need to perceive the changes in standard costs and genuine costs.
Normally, the costs of products are calculated during different phases of the production cycle. By eliminating work-in-process (WIP) accounts, backflush costing is intended to improve on the accounting system and set aside businesses cash.
Benefits and Disadvantages of Backflush Costing
In theory, backflushing has all the earmarks of being a reasonable method for avoiding the numerous intricacies associated with assigning costs to products and inventory. Not logging costs during the different production stages empower companies to save time and reduce their expenses. Companies looking for ways of reducing their primary concerns might utilize backflush costing, yet it isn't generally a simple accounting method to carry out.
The course of backflush costing makes it challenging for companies to audit since it doesn't necessarily in all cases stick to the essential things of accounting.
In any case, backflushing can likewise be challenging to execute and isn't an option accessible to all companies. Besides, there are a few other big provisos: businesses that do backflush costing lack a successive audit trail and may not necessarily in every case adjust to generally accepted accounting principles (GAAP).
Special Considerations
Companies using backflush costing generally meet the following three conditions:
- Short production cycles: Backflush costing ought not be utilized for goods that consume a large chunk of the day to make. As additional time passes by, it turns out to be increasingly challenging to precisely assign standard costs.
- Modified products: The cycle isn't suitable for the manufacture of redone products since this requires the creation of a unique bill of materials for every thing manufactured.
- Material inventory levels are either low or constant: When inventories, the variety of finished goods held by a company, are low, the bulk of manufacturing costs will flow into the costs of goods sold, and it isn't deferred as inventory cost.
Features
- Backflush accounting is one more name for backflush costing.
- Backflush costing is an accounting method intended to record costs under unambiguous conditions.
- Backflush costing is utilized by companies who generally have short production cycles, commoditized products, and a low or steady inventory.
- Backflush costing can be hard to do and only one out of every odd company meets the criteria to conduct backflush costing.
