Cost

Accounting
“Backflush Costing”

Herald L Zamora
 What is a Cost?
Accountants define cost as a resource
sacrificed or forgone to achieve a
specific objective.
A cost is usually measured as the
monetary amount that must be paid to
acquire goods or services.
 What is Cost Accounting?
 Is a process of recording, classifying,
analyzing, summarizing allocating and
evaluating various alternative courses of action
and control of costs. Its goal is to advise the
management on the most appropriate course of
action based on the cost efficiency and
capability. Cost accounting provides the
detailed cost information that management
needs to control current operations and plan
for the future.
Cost Accounting Process
1. Cost
Accumulation- It involves
collecting costs by natural
classification, such as materials or
labor

2. Cost
Allocation or Cost Assignment- It
involves tracing and assigning costs to
cost objects, such as departments or
products.
Three business sectors of the
economy

1.Servicesector
2.Merchandising sector
3.Manufacturing sector
 Types of
Inventory
1.Direct Materials Inventory- Direct
materials in stock and awaiting use
in manufacturing process.
2.Work-in-Process Inventory- Goods
Partially worked on but not yet
completed.
3.Finished Goods Inventory- Goods
completed but not yet sold.
Types of Inventory
Management
System
 Materials Requirement Planning
is a push-through system that manufactures
finished goods for inventory on the basis of
demand forecast. MRP is a production
planning, scheduling, and inventory control system
used to manage manufacturing processes. Most
MRP systems are software-based, but it is possible
to conduct MRP by hand as well.
Just-In-Time (JIT) Methods
 Management uses just-in-time (JIT) methods to obtain
materials just in time for production and to provide
finished goods just in time for sale.
 This practice reduces, or potentially eliminates,
inventories and the cost of carrying them.
 Using a just-in-time system, production does not begin on
an item until the firm receives an order.
 Since just-in-time production responds to an order
receipt, JIT accounting can charge all costs directly to
cost of goods sold. If inventories remain at the end of the
period the cost is removed from cost of goods sold and
moved to inventory accounts.
Cost Accounting Systems
1.Job-Order Costing
2.Process Costing
3.Hybrid Product-Costing
4.Standard Costing
5.Activity Based Costing
6.Backflush Costing
Job Order Costing
This product costing system is used
by firms that provide limited
quantities of products or services
unique to a customer’s needs or
specifications. Costs are assigned
or traced to individual products.
Process Costing
 This system is used by firms that produces
many units of a single product for long
period of time.
 In this cost system, cost are accumulated in
a particular operation or department for an
entire period. The total cost incurred in
each operation or department is then
divided by the total number of units
produced to determine the average cost
per unit of product.
 Hybrid Product-Costing System
 Thiscosting system incorporate features from
two or more alternative product costing
systems, such as job-order and process costing

 One common hybrid-costing system is operation

costing, where materials costs are accumulated
using job-order costing while conversion costs
are accumulated using process costing.
 Standard Costing
 Thiscosting method uses predetermined
factors to compute the standard cost of
materials, labor. And factory overhead,
so that such cost may be assigned to the
various inventory accounts and cost of
goods sold.
Backflush Costing
 Thisis a streamlined cost accounting
method that simplifies, speeds up, and
reduces accounting effort/procedures
in accumulating product costs. Unlike
in traditional job order and process
costing systems, backflush eliminates
the detailed tracking of the cost of
work in process.
Traditional or Normal
Costing versus
Backflush costing
Traditional or normal Costing
 Traditional costing system use
sequential tracking, which is a
costing system in which recording
of the journal entries occur in the
same order as actual purchases
and progress in production.
 Normal costing
Direct
Materials Work in process Finished Goods

X X X XXX XXX XXX

Finished Goods Cost of Goods Sold

XXX XXX XXX

Backflush Costing
Backflush costing is a method that works backward
from the output to assign manufacturing costs to
work-in-process inventories.
Alternative methods:
 Manufacturing costs (direct materials and
conversion) are recorded directly to cost of goods
sold. Work in process inventory and finished
goods inventory, if any, are backflushed from the
cost of goods sold at the end of accounting period
by debiting work in process inventory and finished
goods inventory and crediting cost of goods sold.
 Direct materials are charged to raw and in process
account and conversion costs are charged to costs of
goods sold. Materials cost component of completed
goods are transferred from raw and in process to
finished goods; the materials cost component of goods
completed is transferred from finished goods to costs
of goods sold; ending balances of inventories (raw and
in process, finished goods) as to their conversion costs
components are backflushed from costs of goods sold.
 Manufacturing costs (raw materials and conversion)
are recorded to finished goods inventory. Work in
process inventory, if any, is backflushed from finished
goods inventory at the end of accounting period by
debiting work in process inventory and crediting
finished goods.
 Raw materials and conversion costs
inventory are combined in one account
“raw and in process inventory”. Finished
goods inventory is debited and raw and in
process inventory is credited to record
completed goods.
Concept of
Normal and
Backflush
Costing
 Normal Costing

DM
Work in Finished Cost of
DL goods
process Goods
FOH sold
 Backflush Costing
DM Cost of
Work in Finished
DL goods
process Goods
FOH sold
 Journal entry
comparison of
Normal costing and
Backflush costing
 TRADITIONAL BACKFLUSH
COST Detailed and sequential from Costs are computed
TRACKING acquisition of materials to only when the goods
sale of finished goods are completed or at
the end the period
Materials and
A. Purchase Materials xx conversion costs
of materials Accounts Payables xx xx
Accounts Payable
xx
B. Issuance
of materials Work in process xx No Entry
to Materials xx
production
 TRADITIONAL BACKFLUSH

C. Factory Salaries and wages xx Materials and

Payroll Salaries payable xx conversion costs
xx
salaries pay.
xx
Distribution of Direct Labor xx
payroll to Factory OH xx No Entry
proper Salaries payable xx
accounts
Assignment of Work in process xx
labor cost to Direct labor xx No Entry
work in
process
D. Incurrence of Materials and conversion
other Factory Overhead xx cost xx
manufacturing Various Credits xx Various Credits
costs xx

E. Assignment of
factory overhead Work in process xx No entry
to work in process Factory Overhead xx

F. Recording of
completed goods Finished Goods xx Finished Goods xx
Work in process xx Materials and
conversion cost
xx

G. Sale of Goods Cost of Goods sold xx Cost of Goods sold xx

Finished Goods xx Finished Goods xx
 Backflush
Costing using T
account
 Backflush Costing-
Method 1
Cost of Goods Sold Work in Process

DM X XX X

DL X

FOH X

Finished Goods

X
 Backflush Costing-
Method 2
Raw and In process Cost of Goods Sold

X XX XX

DL X

FOH X XX

Raw and In process Finished Goods

X
X
 Backflush Costing-
Method 3
Materials and
Conversion Cost of goods sold

DM X XXX XXX XX

DL X

FOH X

Materials and
Conversion Finished Goods

X X
Sample Problems
1. Austin Tech uses just-in-time production methods. To
produce 1,200 units for an order, Austin purchased and
used materials costing P10,000 and incurred other
manufacturing cost of P11,000, of which P4,000 was
labor. All costs were on account. After Austin completed
production on the 1,200 units and shipped 1,000 units,
management needed the finished goods inventory balance
for the 200 units remaining. Manufacturing costs are
debited directly to costs of goods sold.
 Required: Journal entries using backflush costing.
Solution:
Entry: Debit Credit

Cost of goods Sold 10,000

Accounts Payable 10,000

Cost of goods Sold 11,000

Salaries payable 4,000

Various Credits 7,000

Finished Goods 3,500

inventory
Cost of goods 3,500
Sold
2. Sharp manufacturing received an order for 10,000
units. The company purchased and used P200,000
of materials for this order. The company incurred
labor costs of P90,000 and other nonlabor
manufacturing costs of P150,000. The accounting
period ended before the company completed the
order. The firm had 5% of total costs incurred still
in work in process inventory and 20% of total costs
incurred still in finished goods inventory. All costs
were on account.
Entry Debit Credit
-Purchase of materials
Cost of goods sold 200,000
Cash 200,000
-Issuance of DM
No Entry
-Incurrence of DL
Cost of goods sold 90,000
Salaries payable. 90,000
-Issuance of DL
No Entry
-Incurrence of FOH
Cost of goods sold 150,000
Various Credits 150,000
-backflushing costs
Work in Process 5% 22,000
Finished Goods 20% 88,000
Cost of goods sold 110,000
 Normal or Traditional costing
-Purchase of materials
Direct Materials 200,000
Cash 200,000
-issuance of materials
Work in Process 200,000
Direct Materials 200,000
-Incurrence of DL
Salaries 90,000
Salaries payable 90,000
-
Direct Labor 90,000
Salaries 90,000
-Issuance of DL
Work in process 90,000
DL 90,000
 debit credit
-Incurrence of FOH
Factory Overhead 150,000
Various credits 150,000
-Issuance
Work in process 150,000
FOH 150,000
-Recording of completed
goods

Finished goods 95% 4180,000

Work in process 418,000
-Sale of Goods
Cost of Goods Sold 352,000
Finished goods 80% 352,000