PERFORMANCE

ASSESSMENT
COST AUDIT
Cost audit involves verification of cost accounting records and to exmine whether these records
adhere to the cost accounting principles, plans, procedures and objectives.

Definition
The terminology issued by the CIMA defines Cost Audit as, "the verification of the correctness
of cost accounts and of the adherence to the cost accounting plan.“
In cost audit various cost accounting records are verified such as:
a) Cost Accounts.
b) Cost Reports.
c) Cost Statements.
d) Cost Data.
e) Costing Techniques used.
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A cost audit reports that whether the above cost accounting records adhere to the
established cost accounting principles, plans, procedures A cost audit reports that
whether the above cost accounting records and objectives.
India's Scenario
In India cost audit is to be conducted with regard to the following:
1. Provisions of Companies Act, 1956 which was amended by the Companies
Amendment Act, 1974 by introducing Section 2338 empowering the Central
Government to order audit of cost accounts. For this purpose maintenance of cost
accounts was prescribed in respect of companies engaged in production, processing,
manufacturing or mining activities under Section 209 (1)(d) such particulars relating
to utilisation of material, labour or other items of cost as may be prescribed.
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Objectives of Cost Audit:
1. Systematic record keeping: To ensure proper records relating to utilisation of material
and labour are available.
2. Facilitate efficiency audit: Proper record maintenance will facilitate efficiency audit
which will examine whether the funds invested in the business are more profitable.
3. Protects the business: Cost audit checks the accuracy of cost records, detects errors,
ensures whether the procedures and routines have been properly followed as required
under the act and thus protects the business.
4. Provides constructive appraisal: During the course of cost audit the cost auditor
provides a constructive appraisal on various issues such as relevance of the existing
procedures and any changes required in order to conform with modern techniques.
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5. Comparison with budget estimates: Cost auditor checks that whether the expenditure
has already been provided for in the budget estimates and that the cumulative
expenditure has not exceeded the budgeted provision.
6. Improves productivity: Cost audit promotes cost consciousness at various levels with
the company leading to cost reduction and co control.
Conditions to be fulfilled for conducting Cost Audit:
7. The company is engaged in production, processing, manufacturing or mining
activities.
8. The company pertains to the class of companies for which there is a specific
notification issued by the Central Government to maintain the cost records.
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3. An order is issued by the central government directing the company to conduct cost
audit. It is to be noted that the cost audit shall be in addition to the statutory audit
conducted under Section 224.
4. The Central Government issues an order to the company to conduct cost audit in
respect of a particular year. At present, the Central Government issues the order for
cost audit on a perpetual basis and so companies are required to conduct the cost
audit from year to year until the Central Government issues a specific order
cancelling the cost audit.
Qualifications of Cost Auditor:
Any person to be appointed as a Cost Auditor shall possess the following qualifications:
5. Cost Accountant within the meaning of the Cost and Works Accountants Act, 1959.
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2. However, a Chartered Accountant possessing the prescribed qualifications may be
appointed as the cost auditor if the Central Government is of the opinion that sufficient
number of cost accountants are not available for conducting the cost audit and a
notification is issued to this effect. It is to be noted that at present no such notification
has been issued. The statutory auditor of the company cannot be appointed as the cost
auditor.
Benefits/Advantages of Cost Audit:
Cost audit benefits the company as well as its various stakeholders:
I. Benefits to the Company Management:
1. Timely detection of errors: Cost audit assists in detection of errors and fraud and thus
improves the morale of the staff making them more careful and accurate in their work.
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2. High degree of reliability: The management can present more reliable and accurate
cost reports and returns to its various stake holders.
3. Improved cost accounting methods: Cost audit ensures improved cost accounting
methods and cost control techniques being introduced in the organisation and thereby
it raises the status of the cost accountant.
4. Timely corrective actions: Cost audit reveals the weakness in the organisations
systems and procedures, and helps in making the management alert to initiate timely
corrective actions.
5. Performance measurement: Cost audit helps in a through comparison of the actuals
against the target performances and in case of inefficiencies in performance to take
remedial measures.
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II. Benefits to the Share holders:
1. True and fair view: Cost audit ensures proper valuation of inventories, utilisation of
resources, productivity improvements of men, material and machines. Thus it ensures
a true and fair view of the companies state of affairs being presented to its
shareholders.
2. Return on investment: A cost audit enables shareholders to compare and evaluate
whether the return on their investment is fair and good or not.
III. Benefits to the Consumers:
1. Fair prices: A cost audit helps in fixing a fair price by the government which will be
beneficial to the consumers as well as acceptable to the industry.
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2. Maintain standards of living: The prices of the consumer goods are not allowed to increase to
a greater extent thereby the consumer can maintain high standards of living.
IV. Benefits to the Government:
1. (1) Helps in determining prices: Cost audit provides accurate data to the government for
fixing selling prices of commodities and thus it prevents undue profiteering.
2. Helps to clear government dues: Cost audit helps to settle the bills submitted to the
government for various contracts undertaken.
3. Protection to certain industries: Cost audit helps the government to take decisions regarding
giving protection to certain industry in the public interest.
4. Helps to settle trade disputes: Cost audit helps the government to settle various trade disputes
in connection with wages, bonus, and other fringe benefits through conciliation.
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ENTREPRENEURIAL APPROACH TO COST
MANAGEMENT
Introduction
Entrepreneurship is the process through which entrepreneur seeks innovation and
employment. Every entrepreneur is prepared to take risk and face challenges.
Thus, innovation and risks are the two basic elements of a good entrepreneurship.
Entrepreneurship:
Any attempt at new business or new venture creation by an individual, a team of
individuals or an established business." - GEM, 1999 UK Executive Report.
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Entrepreneur:
1. According to Peter F. Drucker, "Entrepreneur is one who always searches for change,
responds to it and exploits it as an opportunity". The term Entrepreneur is derived
from French word "entrepreneur" means "to undertake". An entrepreneur perceives a
need and then brings together the manpower, materials and capital required to meet
that need.
2. An “Entrepreneur” is often defined as one who starts his/her own, new and small
business.
Entrepreneurial Approach to Cost Management:
Entrepreneurial approach to cost management works through minimizing cost of
intermediation.
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Entrepreneurial approach to costing involves the following:
1. Core Competencies.
2. Strategic Advantages.
3. Long Term perspective of Cost Management.
Benefits of Entrepreneurial Approach to Cost Management:
4. Profit: Profit is seen as an universal metric. Profit as a performance metric carries
positive effect on performance of the enterprise.
5. Yardstick for Performance Assessment: Each work group/individual can assess own
performance relative to others. It helps in reinforcing/changing behavior that leads to
increase in profits.
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3. Management Tool: It provides management with a mechanism to reward publicly and it
motivates the beneficiaries.
4. Profit Centers: Small firms or Profit and Loss centers are inherently more effective and
efficient than large firms or large Profit and Loss centers. Small firms or Profit and Loss
centers.
5. Cost Reduction: It helps in continuous cost reduction efforts.
A. Economic Appraisal:
Also referred to as "Social Cost Benefit Analysis" and is labelled as "Partial Little Mirrless"
approach. It involves evaluation of the project from the social angle. Economic appraisal
involves analysis of the critical factors, socio-economic benefit, availability of labour, import
substitution, technology absorption, impact on ecology, value addition, FOREX earnings, etc.
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Economic Indicators:
1. Economic rate of return.
2. Effective rate of protection.
3. Domestic resource cost.
CASE STUDY: TATA NANO
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Product Development-NANO:
a) To develop a product for people who want to move from 2 wheeler to 4 wheeler at
affordable price.
b) Car to cost within a price range of Rs. 1,00,000.
c) Car to be developed with low cost, safety, low on emissions and fuel efficient.
d) To be a truly people's car.
e) Car to be developed on three main factors.
i. Cost
ii. Safety
iii. Regulatory requirement
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Benchmarking: It is the search for industry's best practices that lead to superior
performance.“
-Robert C. Camp Quality Guru
Identifying the best practices of the best performer and adopting the same is an emerging
practice and termed as Benchmarking. Benchmarking gives one of the best approach to
identify gap the subject company is lagging behind with the best performance of the best
performer in the respective areas of operations. This approach if not practiced
consciously may lead to chaos at later stages.
Types of Benchmarking:
1. Internal Benchmarking: Internal Benchmarking is the comparison of the similar
operations within one's own industry.
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2. Competitive Benchmarking: Competitive Benchmarking is the comparison of the
best of the direct competitor.
3. Functional Benchmarking: Functional Benchmarking is the comparison of the
methods to the companies with similar processes in the same function outside ones
industry.
4. Generic Process Benchmarking: Generic Process Benchmarking is comparison of
work processes to others who have innovative, exemplar work processes.
Steps of Benchmarking:
The steps of the benchmarking followed are enlisted below:
5. Determine operations/ parameters to benchmark.
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2. Identify key performance variables.
3. Identify best in class companies.
4. Measure the performance.
5. Compare performance and estimate gaps.
6. Specify improvement programs and actions, implement and monitor the results.
The Balanced Scorecard:
7. Balanced Scorecard is a management tool that provides stakeholders with a
comprehensive measure of how the organization is progressing towards the
achievement of its strategic goals.
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2. The balanced scorecard concept was originated by Dr. Robert Kaplan of Harvard
Business School and Dr. David Norton as a framework for managing and
measurement of the organizational performance.
3. The balanced scorecard concept added strategic non-financial performance measures
to traditional financial metrics in order to provide the managers and executives a
more balanced' and 'holistic view of the organizational performance. Over a period of
time the balanced scorecard has evolved from its early use as a simple performance
measurement tool to a complete strategic planning and management system.
Kaplan and Norton's balanced scorecard helps people to view the organization in to four
different perspectives:
4. Financial perspective.
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2. Customer perspective.
3. Internal business process perspective.
4. Learning and Growth perspective.
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The score card measures an organizations performance from four perspectives:
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Strategy and Balanced Scorecard:
Strategy:
Strategy describes how an organization matches its own capabilities with the opportunities in the
marketplace to accomplish its overall objectives.
What is the focus of industry analysis?
a) Competitors
b) Potential entrants into the market
c) Equivalent products
d) Bargaining power of customers
e) Bargaining power of input suppliers
Basic Strategies: (1) Product differentiation(2) Cost leadership
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Implementation of Strategy:
Management accountants design reports to help managers track progress in
implementing strategy.
The Balanced Scorecard:
The scorecard measures an organization's performance from four perspectives:
1. Financial
2. Customer
3. Internal business processes
4. Learning and growth
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Perspectives of Performance:
1. Financial
2. Customer
3. Internal business processes
4. Learning and growth
Financial Perspective:
Objective: Increase shareholder value
Measures: Increase in operating income.
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Financial perspective:

Customer perspective:
Objective: (1) increase market share, (2) increase customer satisfaction.
Measures: (1) market share in communication networks segment, (2) customer
satisfaction survey.
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Internal business process perspective:
Objectives: (1) improve manufacturing quality and productivity (2) meet specified
delivery dates.
Measures: (1) yield (2) On-time delivery.
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Learning and growth perspective:
Objective: (1) align employee and organization goals (2) improve manufacturing process
Measures: (1) employee satisfaction survey (2) improvements in process controls
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Align the balance scorecard to strategy:
Different strategies call for different scorecards.
1. Financial perspective measures:
i. Operating income
ii. Revenue growth
iii. Cost reduction in some areas
iv. Return on investments
2. Customer perspective measures:
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i. Market share
ii. Customer satisfaction
iii. Customer retention percentage
iv. Time taken to fulfil customers request
3. Internal business perspective measures:
i. Innovation Process
ii. Manufacturing capabilities
iii. Number of new products or services
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iv. New product development time
v. Number of new patents
4. Operations Process:
i. Yield
ii. Defect rates
iii. Time taken to deliver product to customers
iv. Percentage of on-time delivery
v. Setup time
vi. Manufacturing downtime
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5. Post-sales service:
i. Time taken to replace or repair defective products.
ii. Hours of customer training for using the product.
6. Learning and growth perspective measures:
i. Employee education and skill level
ii. Employee satisfaction scores
iii. Employee turnover rates
iv. Information system availability
v. Percentage of processes with advanced controls
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SIX SIGMA
Concept of Sigma:
"Sigma" is a letter of Greek alphabet and is a term used in statistics to represent standard
deviation, an indicator of the degree of variation in a set of a process.
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Concept of Six Sigma:
Six Sigma is a statistical concept that measures a process in terms of defects. Six Sigma is a
philosophy, a methodology, symbol of quality and a goal as perfect as practically possible.
Unfolding the Concept of Six Sigma:
Six Sigma is a registered service mark and trademark of Motorola Inc. USA, who first
pioneered Six Sigma methods in 1986 as statistically- based method to reduce variation in
electronic manufacturing processes. It can be put down as:
i. Higher the Sigma value, lesser the chance of a defect.
ii. At the six sigma level, a process produces less than 3.4 defects in a million
opportunities.
iii. Six Sigma means 99.9997% perfect.
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Insights into Six Sigma:
1. Six Sigma is a methodology to improve a business processes by constantly
reviewing, updating and re-tuning the existing process Six Sigma improves the
process performance, decreases variation and maintains consistent quality of the
process output leading to defect reduction and improvement in profits, employee
morale, product quality and finally customer satisfaction.
2. Six Sigma strives for perfection by allowing for only 3.4 defects per million
opportunities for each product or service transaction.
3. Six Sigma relies heavily on statistical techniques to reduce defects and measure
quality.
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History and Evolution of Six Sigma:
Six Sigma was pioneered in U.S. by Bill Smith, who is honoured as the Father of Six
Sigma, a senior Engineer and Scientist at Motorola in 1986. Bill Smith introduced this
quality improvement methodology. Originally it was used as a metric for measuring
defects for improving quality; a methodology to reduce defect levels < 3.4 Defects Per
Million Opportunities (DPMO).
Objectives of Six Sigma:
i. To reduce variation in quality.
ii. To solving the problems in a scientific manner.
iii. To develop the bottom line responsibilities towards continuous improvement.
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iv. To reduce defects.
v. To improve profits through process improvement and defect reduction.
vi. To improve quality of products.
vii. To improve yield/productivity.
viii. To improve consumer satisfaction.
ix. To have best-in-class product/process performance.
x. To improve employee morale.
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Sigma Value:
"Sigma" is a letter of the Greek alphabet and is used in statistics as a measure of
variation. Sigma is a statistical unit of measurement reflective of:(i) Process capability.
(ii) Process performance, i.e. variation.
Sigma Levels:
The Greek letter for Sigma, a, represents one standard deviation from the normal or
average. The higher the sigma level the better the quality level. Six Sigma tries to
achieve a near zero defect with 3.4 defects in a million events.
A value from 1 to 6 that signifies the maximum number of defects per million.
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Six sigma philosophy:
The underlying philosophy of six sigma is to improve customer satisfaction by reducing
and eliminating defects thereby resulting in greater profits.
Six Sigma Methodology:
i. Critical-to-Quality (CTO): Elements of a process that significantly affect the output
of that process. Identifying these elements is figuring out how to make
improvements that can dramatically reduce costs and enhance quality.
ii. Statistical Methods: Six Sigma relies heavily on advanced statistical methods that
complement and reduce the process and product variations.
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Insights to Levels of Six Sigma:
The three levels of Six Sigma are as follows:
1. As a Metric.
2. As a Methodology.
3. As a Management system.
Essentially, Six Sigma is all three at the same time.
4. Six sigma as a matric
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Six Sigma - As a Methodology:
A business improvement methodology that focuses an organization on:
i. Understanding and managing customer requirements:
ii. Aligning key business processes to achieve those requirements.
iii. Utilising rigorous data analysis to minimise variation in those processes.
Six Sigma Methods/Approaches:
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Approaches of sigma:
I. DMAIC Approach:
This is the organizational based. It is undertaken to improve existing business process.
The DMAIC model:
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Steps of DMAIC (Define, Measure, Analyze, Improve and Control)
1. Define Opportunity: Opportunities are identified through Benchmarking, Process Flow
Mapping, and Flowcharts.
2. Measure Performance: Performance is measured through Defect Metrics, Data
Collection, and Sampling.
3. Analyze Opportunity: Opportunities are analyzed with the help of Fishbone Diagrams,
Failure Analysis, and Root Cause Analysis.
4. Improve Performance: Performance is improved through Modeling, Tolerance Control,
Defect Control, and Design Changes
5. Control Performance: Performance is controlled using Statistical Process Control (SPC)
Charts, and Performance Management.
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II. DMADV Approach:
This is based on customer needs and satisfaction. It is undertaken when there is a need to
create a new design or product.
Steps of DMADV also known as "Design For Six Sigma" (DFSS):
1. Define design goals that are consistent with customer demands and the enterprise
strategy.
2. Measure and identify characteristics that are CTQ's (Critical-To-Quality), product
capabilities, production process capability, and risks.
3. Analyze to develop and design alternatives, create a high-level design and evaluate
design capability to select the best design
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4. Design details, optimize the design, and plan for design verification. This phase may
require simulations.
5. Verify the design, set up pilot runs, implement the production process and hand it
over to the process owners.
III. Six Sigma - As a Management System:
A top-down solution to help organizations:
a) Align their business strategy to critical improvement efforts.
b) Mobilize teams to attack high impact projects.
c) Accelerate improved business results.
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d) Govern efforts to ensure improvements are sustained. Framework to prioritise
resources for projects that will improve the metrics, and it leverages leaders who will
manage the efforts for rapid, sustainable, and improved business results.
Six Sigma: Key People Roles:
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1. Executive Leadership: Executive Leadership includes CEO and other key top
management team members, Executive Leadership is responsible for setting up a
vision for Six Sigma implementation.
2. Champions: Champions are drawn from the upper management Champions are
responsible for the Six Sigma implementation across the organization in an integrated
manner. Also act as mentor! leaders to Black Belts.
3. Master Black Belts: Master Black Belts, chosen by champions, act as in-house expert
coach on Six Sigma. They devote 100% of their time to Six Sigma, assist Champions
and guide Black Belts and Green Belts, spend time on ensuring integrated
deployment of Six Sigma across various functions and departments.
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4. Black Belts: Black Belts operate under Master Black Belts to apply Six Sigma
methodology to specific projects Black Belts devote 100% of their time to Six Sigma.
They primarily focus on Six Sigma project execution.
5. Green Belts: Green Belts are the employees who operate under the guidance of Black
Belts and support them in achieving the overall results.
Examples of Organisations Implementing Six Sigma:
a) Financial: Bank of America, GE Capital, HDFC, HSBC, American Express, Merrill
Lynch.
b) ITES: ICICI One source, Accenture, Satyam PO, IBM Daksh.
c) Hospitality: ITC Hotels, GRT Hotels, Apollo Hospitals.
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d) Manufacturing: GE Plastic, Johanson and Johnson, Motorola, Nokia, Microsoft,
Ford, Wipro, Nestle, Samsung, Samtle, Suresh Hundre's Polyhydrons Ltd. at
Belgaum.
e) Telecom: Bharti Cellular, Vodafone, Siemens, Tata.
f) IT: Wipro, Mahindra-Satyam, Acenture, Infosys, TCS, Birla.
g) Service: Mumbai Dabbawalas are Six Sigma Certified.
h) Other Sectors: Caterpillar, Honeywell International (previously known as Allied
Signal), Raytheon.
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IV. LEARNING CURVE:
1. Learning curve shows how learning improves with experience. Actual learning
happens over many trials. Learning curves are based on the understanding that people
and organisations become better at their tasks as the tasks are repeated. It is based on
an assumption that when similar task is repeatedly performed the time taken in order
to accomplish such task declines. This in turn results in decline in costs also.
2. Learning Curves were introduced by T. P. Wright, Buffalo, USA of Curtis-Wright
Corporation in 1936. The theory of learning curve were first applied to the aircraft
manufacturing industry by T. P. Wright in a research report entitled, "Factors
Affecting the Cost of Airplanes," published in the Journal of the Aeronautical
Sciences in February 1936.
3. In a nutshell this theory states that the costs of making particular product decreases
with learning
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V. PRAISE ANALYSIS:
The acronym 'PRAISE' stands for Problem Identification, Ranking, Analysis, Innovation,
Solution, and Evaluation. Identification of improvement opportunities and implementation of
quality improvement process, of the TQM process is through a six-step activity sequence,
identified by the acronym 'PRAISE'. These steps are briefly explained as follows:
Step 1: Problem Identification Elements Involved: Problems are identified through:(i) Areas of
customer dissatisfaction.(ii) Absence of competitive advantage.
Step 2: Ranking Elements Involved: Prioritize problems and opportunities by:(i) Perceived
importance, and (ii) Ease of measurement and solution.
Step 3: Analysis
Elements Involved: Ask "Why?" to identify possible causes. Keep asking "Why?" beyond to
the more symptoms and to avoid jumping to premature conclusion
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i. Ask 'What?' to consider potential implications.
ii. Ask How much?' to quantify cause and effect.
Step 4: Innovation Elements Involved: Use creative thinking to generate potential
solutions. Operationalize these solutions by identifying:(i) Barriers to implementation,(ii)
Available enablers, and (iii) People whose co-operation must be sought.
Step 5: Solution Elements Involved:(i) Implement the preferred solution.(ii) Take
appropriate action to bring about the required changes. (iii) Reinforce with training and
documentation back-up.
Step 6: Evaluation Elements Involved: Monitor the effectiveness of actions. (i) Establish
and interpret performance indicators to track progress towards objectives (ii) Identify the
potential for further improvements and return to Step-1
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Essentials of PRAISE System:
Central to the PRAISE system are:
a) Quality Control: The search for continuous improvements in quality; and
b) Total Employee Involvement: The co-operation and commitment of employees. This
dual approach provides a single focus is on the 'customer', whose increased
satisfaction remains the primary goal of the procedure.
Implementation of PRAISE Process:
A three-point action plan for implementation of the process is explained as follows:
1. Small to Big Issues: Issues need to be classified into small and big.
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2. Solvable Problem: Selection of the problem must be undertaken judiciously as the
problem selected should not be trivial, but it should be one with a potential impact
and a clear improvement opportunity.
3. Recognition of Participants: The successful projects and team members should
receive appropriate timely recognition.
VI. SIMULATION:
Simulation is imitation of a real-life situation or process. Simulation is the imitation of
the operation of a real-world process or system over time. The act of simulating
something first requires that a model be developed; this model represents the key
characteristics, behaviors and functions of the selected physical or abstract system or
process used in the real-world.
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Need for Simulation Model:
1. Accurate costing of products is an essential activity within any large organisation with a diverse
product mix.
2. Accurate costing is a key requirement for identifying the organisations ultimate profitability.
3. A diverse and complex product mix is likely to require an involved process to reveal individual
product costs.
4. In these circumstances it can be a major achievement simply to arrive at a product level cost
estimate.
5. However, there is a second and even more demanding dimension to the cost estimation process and
that is to ask how reliably, in terms of precision and accuracy, those costs have been estimated.
6. If it is agreed that it is important to estimate costs, then it is clearly and equally important to
quantify the quality of those cost estimates.
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VII. Total Productive Maintenance (TPM):
Total Productive Maintenance can be considered as the medical science of machines.
Total Productive Maintenance refers to a management system for optimizing the
productivity of manufacturing equipment through systematic equipment maintenance
involving employees at all levels. It is a maintenance program which involves a newly
defined concept for maintaining plants and equipment.
Goals of Total Productive Maintenance (TPM):Apart from eliminating equipment
downtimes, improving equipment productivity, and zeroing out defects, Total Productive
Maintenance has the following goals:
a) Improvement of personnel effectiveness sense of ownership.
b) Reduction of operational costs,
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c) Reduction of throughput times, and
d) Customer satisfaction down the road.
Key Strategies of Total Productive Maintenance (TPM): Total Productive Maintenance
has eight key strategies as enlisted below:
i. Focused Improvements (Kaizen);
ii. Autonomous Maintenance;
iii. Planned Maintenance;
iv. Technical Training:
v. Early Equipment Management;.
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vi. Quality Maintenance;
vii. Administrative and Support Functions Management; and
viii. Safety and Environmental Management.
Benefits of Total Productive Maintenance (TPM):Total Productive Maintenance
eliminates six big losses as enlisted below:
ix. Breakdowns, which can result in long, expensive repairs;
x. Set-ups, conversions, and changeovers;
xi. Idling and minor stoppages;
xii. Reduced equipment speed;
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v. Defects and Rework; and
vi. Start-up Losses.
Back-Flush Accounting:
Back-flush Accounting is to wait until the manufacture of a product has been completed,
and then record all of the related issuances of inventory from stock that were required to
create the product. The emphasis is to measure cost at the beginning and at the end with
greater emphasis on the end or final outputs. Back-flush Accounting system records the
transaction only at the termination of the production and sales cycle.
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Essentials for Back-flush Accounting System:
Essentials for a reliable back-flush accounting system are an accurate bill of materials, measures
of yield, effective production control and accurate engineering change noticed when yields do
change.
Advantages:
Back-flush accounting is entirely automated, with a computer handling all transactions. Thus
Back-flush Accounting approach has the advantage of avoiding all manual assignments of costs
to products during the various production stages, thereby eliminating a large number of
transactions and the associated labour.
Challenges Involved:
Back-flush accounting is a theoretically elegant solution to the complexities of assigning costs to
products and relieving inventory, but it is not easy to implement in reality.
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