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Wednesday, August 12, 2009

Backflush Accounting (Backflush costing).

Backflush Accounting (Backflush costing).

Definition:

CIMA defines it as “cost accounting system, which focuses on the output of an organization and then works back to attribute costs to stock and cost of sales”.

Traditional costing systems use sequential tracking, i.e., costing methods are synchronized with physical sequences of purchases and production.

Backflush costing is the reversal of traditional costing, where traditional costing flow from accounting of inputs to outputs but backflush starts accounting only from outputs and then works back to apply manufacturing costs to units sold and to inventories. In this, cost of inventories are at the time of sale only. Costs are then flushed back through the accounting system. It is attractive for low inventory companies which results from JIT.

It eliminates WIP account. There are reason for justification, they are as follows.

i) To remove incentive for managers to produce for inventory.

ii) To increase the focus of the managers on plant-wide goal rather than on individual sub-unit goals.


Difficulties of Backflush costing:

i) It does not strictly adhere to generally accepted accounting principles of external reporting.

ii) Absence of audit trails leads to critics.

iii) It does not pinpoint the use of resources at each step of the production process.

iv) It is suitable only for JIT production system with virtually no direct material inventory and minimum WIP inventories. It is less feasible otherwise.

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