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8/12/2019 BackFlush Costing2
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What is backflush costing?
It is an accounting system that applies costs to products
only when the production is complete.
It omits recording some or all of the journal entries relating
to the stages from the purchase of direct materials to the
sale of finished goods
It describes a costing system that delays recording some or allof the journal entries relating to the cycle from purchase ofdirect materials to the sale of finished goods.
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Special Considerations
It does not necessarily comply with GAAP
It does not leave a good audit trail the ability of theaccounting system to pinpoint the uses of resourcesat each step of the production process
However, inventory levels may be immaterial, negating
the necessity for compliance
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Types of Business using BC
makes the most sense for private
companies with just-in-time inventory
systems or those that use activity-based costing.
It does not leave a good audit trail the ability of theaccounting system to pinpoint the uses of resourcesat each step of the production process
best suited to companies that maintain low
inventories because costs then flow directly to
cost of goods sold.
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The process beginsfrom the Stage A i.e.
Purchase of DirectMaterial followed byStage B where in actualproduction starts andWork comes underprogress. FinishedGoods produced forms
Stage C followed bytheir sale i.e. Stage D.
Purchaseof DirectMaterial
Productionresulting inWIP
Completionof FinishedGoods
Sale ofFinishedGoods
The rocess
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ADVANTAGES
less entries have to be passed soit saves time. (major benefit)
less costly as less documentationhave to be maintained.
it uses JIT environment which savesholding cost of inventory.
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DISADVANTAGES
One of the main disadvantages of the system is
that it only works under some quite strict
requirements. If these are not met, the system will
become unbalanced and may be quite unusable,or a nightmare to maintain
Another drawback is that detailed information formanagement purposes may not be available wher
needed, and the production control therefore need
to be all the stronger.
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DISADVANTAGES
The cost accounts used in back-flush accounting
may be more difficult to reconcile to financial
accounts needed for reporting
inability of the accounting system to pinpoint the
uses of resources at each step of the productionprocess.
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Speaker Technology, Inc., recently
introduced backflush costing and JIT.
Model AX27 Standard material cost: $14
Standard conversion cost: $21
Actual production for the month: 400 unitsActual materials purchased: $5,600
Actual conversion costs: $8,400
Backflush Costing Example
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Materials Inventory 5,600
Accounts Payable or Cash 5,600To record material purchases
Conversion Costs 8,400Accrued Wages 8,400
To record conversion costs incurred
Backflush Costing Example
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Finished Goods Inventory 14,000
Material Inventory 5,600
Conversion Costs 8,400To record costs of completed production
Cost of Goods Sold 14,000Finished Goods Inventory 14,000
To record costs of 400 units sold
Backflush Costing Example
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Cost of Goods Sold 14,000Material Inventory 5,600
Conversion Costs 8,400
The Finished Goods Account can be eliminated.
Backflush Costing Example