Backflush

Costing
INTRODUCTIO
N!

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Backflush costing is an
accounting method that
records costs after a good is
sold or a service is
completed. Backflush
costing is common among
companies that use a Just-
in-Time inventory
management system. It
avoids the costly and
complicated reporting of all
expenses as they occur, and
instead “flushes” all
expenses in a single entry
once the production process
is completed.
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 Backflush costing is an accounting method
that records costs after a good is sold or a
service is completed.
 The backflush costing method uses a standard
cost per unit and multiplies this cost by the
number of units produced to determine the
expense amount.
 Backflush costing is especially valuable to
companies with many costs involved in
production; however, it isn’t suited to
companies that sell customizable products.

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WHEN
USED?

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  Companies that keep low levels of
  inventory and experience high turnover in
inventory.
 Costing method works particularly well,
where many different costs go into the
production of a good.
 Generally, manufacturing companies with
complex production processes use
backflush costing.

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> Avoid complexities
> Saves Time
> Lower Accounting
Cost
> Easily assign costs to
corresponding
inventory

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> Requires fast
production time
> Requires an accurate
production count
> Requires an accurate
bill of materials

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Applicability
in
Manufacturing
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Large Company: Apple Inc. Apple's chief executive
officer (CEO) Tim Cook parlayed the 167 years of supply
management experience he gained working at IBM and
Compaq Computers to entirely revamp Apple's
manufacturing process Starting as Apple's chief operating
officer (COO) in 1998, Cook pulled the company out of
manufacturing, closing Apple's warehouses and facility
around the world. He opted instead to establish just-in-
time relationships with independent manufacturing
contractors, many of them located in China where labour
and cost of goods were much cheaper Cook's supply
chain improvements reduced the amount of time Apple's
inventory sat on the company's balance sheet, which went
from months to days. Cook credits these changes as a key
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factor in Apple's growth and profitability
Medium Small Organization: Medium Small publication
houses or On-demand publishing is a prime example of
the IT inventory method, and it has become popular with
independent publishers and self-publishing businesses
Master manuscripts of books are kept on hand, but tests
are only printed and assembled as needed when a retail
sale is made. This reduces book store returns and
wasteful pulping of unsold inventory.

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Applicability
in Non-
Manufacturing
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Large Organization: Big-box retailers Target Corporation
(TGT) and Walmart Inc. (WMT) schedule their seasonal
merchandise to arrive just as demand is beginning to pick up
for specific items. As the season draws to a close and
demand wanes, shelves are cleared to make room for the
next season's items.
 Small Organization: Even smaller retailers can take
advantage of the JIT method to streamline the delivery
process. For example, a company that markets office
furniture but does not manufacture it may order the furniture
from the manufacturer only when a customer makes a
purchase. The manufacturer delivers it directly to the
customer. The retailer has saved the cost of storing
inventory. 14
Toyota Industries

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• Toyota was founded in 1937 in Japan, 2 years
before World War II began.
 
• The company barely survived through the war
period by supplying military cars and trucks
and was way behind it's competitors like Ford
and General Motors.
 
In 1952, the company introduced the "Just in
Time" inventory system to improve efficiency
where vehicles were manufactured on the basis
of actual demand received from the dealers

 
• Toyota used Backflush Costing, eliminated the
practice of Demand Forecasting to assist
production and worked with zero inventory
thereby avoiding 4 inefficiencies namely:
Excessive Resource Allocation, Overproduction,
Excess Inventory and Increased Capital Costs.
 The company was able to significantly cut costs,
increase production, further leading to increased
profit margins. The company fought back hard
during adversity taking the efficiency route and
  most of its competitors.
today it stands taller than
Research
Paper

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About
IT
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This study is focused on one of the emerging system of
accounting i.e. backflush accounting. This study aimed to
identify that whether this backflush costing is boon or effrontery
in the field of accounting for businesses? To meet the objective
of the study past studies, literature and articles are gone through.
This study found that backflush costing simplifies the
accounting process, requires fewer resources (time, men, and
money) as compared to traditional costing. This study also found
that this costing system does not provide detailed information of
cost data and not fully compliance with generally accepted
accounting principles. The study concluded that backflush
costing is boon for businesses using JIT approach. The study
suggested that companies having short manufacturing cycle and
minimum inventory requirements should also adopt backflush
costing and it will be boon for them.
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Finding
s
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Swenson & Cassidy (1993) undertook a survey of 22 JIT
using companies to identify impact of JIT on
manufacturing system. Their study found that average
reduction in scrap and rework 44%, reduction in setup
time 47%, reduction in inventory 46%. They also found
that majority of firms believed that the performance
measurement system become less complex following the
implementation of JIT. They also found that the
implementation of JIT results in greater improvement in
many areas including non-financial parts.

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Conclusio
n

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From the current environment of business it can be said
that the accounting and costing system requires some
modified branches to meet the requirement of specific
type businesses that will helpful them to boost their
performances. From the past study and literature it can be
concluded that backflush costing is most suitable to
businesses using JIT approach in manufacturing. It is
suggested that the manufacturing companies having short
manufacturing cycle and minimum inventory should also
adopt backflush costing and it’s a boon for them. It will
simplify the costing process and improve business
performance.
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Thanks!

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