Understanding Backflush Costing (Backflush Accounting)
Backflush costing, also known as backflush accounting, is an accounting method used to assign costs to products after the completion of the production process.
This approach involves working backward to determine the final price of manufactured goods.
How Does Backflush Costing Work?
In backflush costing, costs are not assigned during the production process. Instead, all the raw materials, labor, utilities, and other expenses are accounted for after production.
A final journal entry is made, incorporating all the costs incurred, and a standard cost is assigned to the product.
This simplifies the bookkeeping process and saves time for the company.
Where Can Backflush Costing Be Used?
Implementing backflush costing can be challenging and requires a diligent and expert team.
It is more suitable for products with shorter manufacturing periods, as it simplifies the bookkeeping process.
Customized products pose difficulties because each product would have different standard costs that must be calculated separately.
Advantages of Backflush Costing
Backflush costing offers several advantages:
- It is a time-efficient accounting procedure that eliminates the need to track expenses throughout the production process and streamlines the accounting workflow.
- It supports a low inventory system, reducing storage costs and improving cost-efficiency.
Disadvantages of Backflush Costing
Backflush costing has its drawbacks:
- Its implementation can be complex, and any mistakes can result in financial losses for the company.
- The single-entry system makes it challenging to conduct audits, as it lacks transaction-level proof.