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Backflush-Costing PDF
Backflush-Costing PDF
The companies adopting backflush costing often meet the following three
conditions :
If 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
especially attractive in companies that have low inventories resulting from
JIT.
1. 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:
4. There are two drawbacks of this costing method. The Backflush costing is
a concept that is not widely considered to be in compliance with generally
accepted accounting principles. It also lacks the sequential audit trail.
Example of Backflush Cost Accounting :
The following example will be used to illustrate the first two variant
outlined above.
The manufacturing cost information for March for a division of XYZ plc
is as follows :
Variant 1 :
Conversion costs
£’000 £’000
FG 6,380
£’000
Raw and in process materials 650
Finished goods 1,540
2,190
The balance on the conversion cost account would be carried forward and
written off at the end of the year.
Variant 2 :
The accounting entries where there is only one trigger point (on
completion of units) would be simpler.
DR CR
£’000 £’000
1. CC account 4,440
Cash 2,800
Cash/creditors 1,640
3. COGS 6,380
FG account 6,380
This variant is thus only suitable for JIT system with minimal raw materials
stocks.
Another Example of Backflush Cost Accounting :
Assume that there were no opening stock of all types and no material
variances arise during March
Answer :
Notes :