Backflush Costing (Backflush Accounting) Definition
Backflush costing, also known as backflush accounting, refers to a method of product cost accounting in which the calculation of costs is postponed until the goods are completely produced. The process gets its name “backflush” because it delays the costing issues until after the information can be affirmed and it can be reliably determined whether the actual costs are less or more than the estimated cost.
Backflush Costing (Backflush Accounting) Key Points
- Postpones the recording of costs until after the products are completed.
- Used in streamlined modern manufacturing environments with minimal work-in-progress.
- Designed to save on the administrative costs of tracking and allocating costs.
- The method is not in agreement with accepted accounting principles (GAAP) due to the absence of cost flow assumption.
What is Backflush Costing (Backflush Accounting)?
Backflush Costing is an accounting system that waits to record costs until the production of goods is completed. It’s typically used in just-in-time (JIT) manufacturing environments where companies work to reduce the amount of time and resources tied up in inventory.
Why is Backflush Costing (Backflush Accounting) Used?
The Backflush Costing method is used because it saves on the administrative costs related to tracking and allocating costs to individual units of production. It helps in simplifying the costing process by eliminating several steps, hence making the accounting system more efficient.
Where is Backflush Costing (Backflush Accounting) Applied?
Backflush Costing is mainly applied in modern, streamlined production environments where there is minimal inventory and work-in-progress. It’s best suited for businesses employing JIT manufacturing techniques.
When is Backflush Costing (Backflush Accounting) Used?
Backflush Costing is used when finished goods are produced. Because costs aren’t recorded until the end of the production cycle, this system is not advisable for organizations requiring detailed and timely information about individual product costs.
How Does Backflush Costing (Backflush Accounting) Work?
In Backflush Costing, instead of allocating costs to products during the production process, costs are recorded after production is completed. At this point, the standard costs of production are compared against the actual costs, and any variance is adjusted. It is an approach that fundamentally contrasts with the traditional costing method, which involves the allocation of costs at each production stage.
Limitations of Backflush Costing (Backflush Accounting)
The major limitation of Backflush Costing is that it doesn’t align with the Generally Accepted Accounting Principles (GAAP). This is because it doesn’t present a clear cost flow assumption. Additionally, it might distort the cost figures if production levels vary significantly, leading to inaccurate financial reporting.
