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 all
of the journal entries relating to the cycle from purchase of
direct materials to the sale of finished goods.
Special Considerations
It does not necessarily comply with GAAP
It does not leave a good audit trail the ability of the
accounting system to pinpoint the uses of resources
at each step of the production process
However, inventory levels may be immaterial, negating
the necessity for compliance
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 the
accounting system to pinpoint the uses of resources
at each step of the production process
best suited to companies that maintain low
inventories because costs then flow directly to
cost of goods sold.

The process begins
from the Stage A i.e.
Purchase of Direct
Material followed by
Stage B where in actual
production starts and
Work comes under
progress. Finished
Goods produced forms
Stage C followed by
their sale i.e. Stage D.
Purchase
of Direct
Material
Production
resulting in
WIP
Completion
of Finished
Goods
Sale of
Finished
Goods
ADVANTAGES
less entries have to be passed so
it saves time. (major benefit)
less costly as less documentation
have to be maintained.
it uses JIT environment which saves
holding cost of inventory.
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 for
management purposes may not be available where
needed, and the production control therefore need
to be all the stronger.
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 production
process.
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 units
Actual materials purchased: $5,600
Actual conversion costs: $8,400
Backflush Costing Example
Materials Inventory 5,600
Accounts Payable or Cash 5,600
To record material purchases
Conversion Costs 8,400
Accrued Wages 8,400
To record conversion costs incurred
Backflush Costing Example
Finished Goods Inventory 14,000
Material Inventory 5,600
Conversion Costs 8,400
To record costs of completed production
Cost of Goods Sold 14,000
Finished Goods Inventory 14,000
To record costs of 400 units sold
Backflush Costing Example
Cost of Goods Sold 14,000
Material Inventory 5,600
Conversion Costs 8,400
The Finished Goods Account can be eliminated.
Backflush Costing Example