By Group -- 5

Backflush Costing

What is Backflush Costing?What is Backflush Costing?

““Backflush Costing is a method that Backflush Costing is a method that works backward from the output to works backward from the output to assign manufacturing costs to work-assign manufacturing costs to work-

in-progress and inventories” in-progress and inventories”

Some key PointsSome key Points The term ‘Backflush’ is used because costs are

flushed back through the production process to the point at which inventories remain

Backflush Costing avoids detailed accounting transactions as, no separate accounts are maintained for work-in-progress in blackflush accounting.

In Backflush Costing, first focus, is on the output of the organization and work backwards to allocate costs between costs of goods sold and inventories.

“Traditional normal and standard costing systems use sequential

tracking. Under sequential tracking, recording of journal

entries follows the same order in which the four stages of purchases

of material, work-in-process, finished goods and sales take

place.”

Traditional CostingTraditional Costing

Comparison Comparison Backflush Costing Traditional Costing

The ProcessThe Process

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.

Thus We Can Say;Thus We Can Say;

How Can Backflush Costing Help ?How Can Backflush Costing Help ?

““Back flush costing can simplify Back flush costing can simplify traditional job costing systems traditional job costing systems

by not recording journal entries by not recording journal entries for work-in-process, purchase of for work-in-process, purchase of

raw material or production of raw material or production of finished goods” finished goods”

How does it works?How does it works?

Costs Flow Through T AccountsCosts Flow Through T AccountsDirect materials costs are charged

directly to the Cost of Goods Sold account Direct labor and manufacturing overhead

costs are combined in the Conversion Costs account and transferred to the Cost of Goods Sold account

Once all product costs for the period have

been entered into the Cost of Goods Sold account, calculate the amounts to transfer back to the inventory accounts

Calculating amounts transferred Calculating amounts transferred back to Inventory Accountback to Inventory Account

Finished Goods Inventory account

Difference between the cost of units sold and the cost of completed units

Work in Process Inventory account

Amount charged to the Cost of Goods Sold account during the period less the actual cost of goods finished during the period

Journal EntriesJournal EntriesParticulars Dr/

CrAmount

Inventory: Material and In Process Control To Accounts Payable Control

Dr. XXX

Conversion costs control To Various Accounts (such as Wages Payable)

Dr. XXX

Finished Goods Control To Inventory: Material

& In Process Control To Conversion costs allocated

Dr. XXX

Journal Entries Cont…Journal Entries Cont…Particulars Dr/

CrAmount

Cost of goods Sold To Finished goods control

Dr. XXX

Conversion Costs allocated (Cost of goods sold) To Conversion costs control

Dr. XXX

Reasons for using Backflush CostingReasons for using Backflush Costing

To remove the incentive for managers to produce for inventory.

To get managers more focused on selling units.

THANK YOU !!!