What is Backflush Costing
Backflush costing is a product costing system generally used in a just-in-time (JIT) inventory environment. Backflush costing delays the costing process until the production of goods is completed. Costs are then "flushed" back at the end of the production run and assigned to the goods. This eliminates the detailed tracking of costs throughout the production process, which is a feature of traditional costing systems.
Being a method of accounting, it is not uncommon to see backflush costing also referred to as backflush accounting.
BREAKING DOWN Backflush Costing
By eliminating work-in-process accounts, backflush costing simplifies the accounting process. However, this simplification and other deviations from traditional costing systems mean that backflush costing may not always conform to generally accepted accounting principles (GAAP). Another drawback of this system is the lack of a sequential audit trail.
Companies using backflush costing generally meet the following three conditions:
- Management seeks a simple accounting system and no detailed tracking of direct material and direct labor costs.
- Every product has a set of standard costs.
- Material inventory levels are either low or constant. When inventories are low, the bulk of manufacturing costs will flow into costs of goods sold, and it is not deferred as inventory cost. Backflush costing is particularly attractive to companies that have low inventories resulting from just-in-time inventory or manufacturing strategies.
Backflushing is a theoretically elegant solution to the many complexities in assigning costs to products and inventory, but in reality, it is often rather difficult to implement. Backflushing is not ideal for extended production processes, as it takes too long for the inventory records to be reduced after the completion of products. It is also not suitable for the fabrication of customized products since this requires the creation of a unique bill of materials for each item manufactured.