Written Report

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AC512 Cost Accounting Part 2

Submitted by: Cornejo, Sue Cleo Imperial, Sheena Pedroza, Pia Loraine Rodrigo, Karla Angela Therese Yutico, Roxane Mae

Submitted to: Oscar Villaflor 

What is Backflush Costing? Backflush accounting  is a product costing approach, used in a Just-In-Time (JIT) operating environment, in which costing is delayed until goods are finished. Standard costs are then flushed backward through the system to assign costs to products. The result is that detailed tracking of costs is eliminated. Journal entries to inventory accounts may be delayed until the time of product completion or even the time of sale, and standard costs are used to assign costs to units when journal entries are made, that is, to flush costs backward to the points at which inventories remain.

It is a method of   costing a product that works backwards: standard costs are allocated to finished products on the basis of the output of a repetitive manufacturing process. Used where inventory is kept at minimum this method obviates the need for detailed cost tracking required in absorption costing, and usually eliminates separate accounting for  work-in-process. It also called  backflush accounting. Special Consideration  Backflush costing does not necessarily comply with GAAP  However, inventory levels may be immaterial, negating the necessity for

compliance  Backflush costing 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 Types of Business using Backflush Costing

Backflush costing makes the most sense for private companies with just-in-time inventory systems or those that use activity-based costing. As mentioned above, backflush costing is not consistent with GAAP and cannot be used by public companies that are subjected to strict reporting requirements. Companies that must be audited, either internally or by independent third-party auditors, may not be able to use backflush costing because it does not leave much of an audit trail. It is not possible to report an accurate inventory value at most points in the production process. If the inventory cycle is long, backflush costing will greatly undervalue the inventory during most of the year. When the products are finally sold, the  backflush of costs can make a product that seemed profitable into a money loser for the company. Trigger Points of Backflush Costing

Trigger point refers to a stage in the c ycle from purchase of direct materials (stage-1) to sale of finished goods (stage-4)

Traditional Trigger Points

Stage-1

Stage-2

Stage-3

Stage-4

Purchase of Direct Materials

Production of Work in Progress

Completion Sale of of a Good Finished Finished Units Units

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 co st 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:  Standard costs must be reliably estimated and variances kept to a minimum  The premise of the system is that a sale triggers the manufacturing process,

therefore  Buildup of work in progress or finished goods needs to be avoided  Another drawback is that detailed information for management purposes ma y not be

available where needed, and the production control therefore needs to be all the stronger.  The cost accounts used in back-flush accounting may be more difficult to reconcile to financial accounts needed for reporting There are some drawbacks to using the backflush costing method of accounting for inventory. By eliminating the work-in-process account, backflush costing may produce a more accurate view of a particular company's inventory, but this difference often makes the method go against generally accepted accounting principles (GAAP). The main concern is that inventory is undervalued during some phases of production because there is no work-in-process account to catch those costs.