Definition: Backflush costing is an accounting system that waits until all of the production processes are completed before recording any direct material usages. In other words, as raw materials and work in process inventory are used during the production process, no journal entries are created to record these expenditures. Instead, one main journal entry is used at the end of the production process to record all of the inventory that was used during the manufacturing process.
Since journal entries were not made as inventory was used, accountants and must use standard or normal costing to work backward to assign costs to finished goods. In this sense, the costs associated with producing the products are “flushed back” in the cycle after the fact and assigned to the proper goods and categories.
This costing system is particularly useful for more complex products that require many different stages of manufacturing. Normally, each stage of manufacturing would require a separate journal entry to keep track of costs throughout the production process. This can add up to hundreds of entries for a single product. Now imagine if the company produces a couple hundred products. It adds up to a ton of bookkeeping that is somewhat unnecessary.
The backflush costing system eliminates unneeded journal entries throughout the process and simplifies the bookkeeping and administrative duties without losing too much detail or information. It does not however work well for all products or manufacturing systems.
For example, back flush costing shouldn’t be used for products that take a long time to produce. As more time goes by, it becomes more difficult to assign costs accurately. Think about it this way. You can easily look back at the cycle and assign costs to a product that was produced in one day, but a product that was made over the course of a year might be more difficult. Also, custom orders typically don’t use this system as management would have to create a separate bill for each set of materials used.
This costing system is best used for processes with short production times that utilize just in time inventory systems.
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