Backflush costing

Backflush costing is a delayed accounting approach,

1. What is Backflush Costing? Girish M C Asst Prof of Commerce Panampilly Memorial Govt College, Chalakudy 1/6/2020 1 Girish M C, Asst Prof of Commerce, Panampilly Memorial Govt. College, Chalakudy

2. In traditional cost accounting :especially in budgeted and standard costing timely entries are recorded in cost accounting ies purchase of materials , issue of materials for production, wages and overhead incurred and W-I-P , completed goods or finished products . But in backflush accounting is an alternative to this traditional tracking . In this recording of entries are delayed until the finished goods have been produced. Introduction 1/6/2020 2 Girish M C, Asst Prof of Commerce, Panampilly Memorial Govt. College, Chalakudy

3. What is Backflush Costing? Backflush costing/accounting is an accounting approach generally used in a just-in-time (JIT) inventory environment. In short, it is an accounting method that records the costs associated with producing a good or service only after they are produced, completed, or sold. In this system the costing are delayed until goods are finished. This approach helps in eliminating all work-in-progress accounts and manual assignments of costs to products during the various production stages. Back Flush Costing 1/6/2020 3 Girish M C, Asst Prof of Commerce, Panampilly Memorial Govt. College, Chalakudy

4. According to CIMA Terminology “ Backflush accounting is a method of costing , associated with a JIT production system, which applies cost to the output of a process . Costs do not mirror the flow of products through the production process, but are attached to output produced ( finished goods stock and cost of sales ), on the assumption that such back flushed costs are a realistic measure of the actual costs incurred”. Meaning and Definition 1/6/2020 4 Girish M C, Asst Prof of Commerce, Panampilly Memorial Govt. College, Chalakudy

5. 1. Short Lead time in Production process: Larger lead time in manufacturing process indicates the higher the inventory in the W-I-Process. In larger production process have higher lead time cannot use backflush accounting as it will create a huge gap between the physical and logical inventory. 2. Defectless production process: Defect products will not become part of the finished goods. Backflush accounting focus on finished products. 3.Product based layout:- Highly used in product based layout where the bill of Material and mass production are the norms. Hence not suitable for customised production. 4. Secure Environment:- A highly secure facility where there is no scope for pilferage and theft. Conditions for implementing Backflush Accounting 1/6/2020 5 Girish M C, Asst Prof of Commerce, Panampilly Memorial Govt. College, Chalakudy

6. Backflush costing is used by companies who generally have short production cycles, commoditized products, and a low or constant inventory. Backflush costing is an accounting method designed to record costs under specific conditions.  Backflush accounting is another name for backflush costing.  Backflush costing can be difficult to do and not every company meets the criteria to conduct backflush costing.  Key Takeaways 1/6/2020 6 Girish M C, Asst Prof of Commerce, Panampilly Memorial Govt. College, Chalakudy

7. Merits 1.It is simple accounting system , hence, accounting costs are lower.. 2.It avoid the need to record production costs. It eliminates a lot of material administration, record keeping and clerical costs.. 3.When inventory level are low or constant , it yields the same resulted as traditional costing methods. 4.Backflushing appears to be a sensible way to avoid the many complexities associated with assigning costs to products and inventory. Merits and Demerits of Backflush costing 1/6/2020 7 Girish M C, Asst Prof of Commerce, Panampilly Memorial Govt. College, Chalakudy

8. It provide less detailed management information than traditional cost accounting . 2. It required training for staff to start ... 3.It makes difficult for companies to audit because it doesn’t always adhere to the basic fundamentals of accounting. 4.Backflush can also be challenging to implement and is not an option available to all companies. 5.Business that do back flush costing lack a sequential audit trail and may not always conform to generally accepted accounting principles. (GAAP) Demerits of Backflush Costing. 1/6/2020 8 Girish M C, Asst Prof of Commerce, Panampilly Memorial Govt. College, Chalakudy

9. There are three variant in backflush accounting. 1. Trigger point are Material Purchase (including Components ) and Finished Goods. 2. Trigger point are Material Purchase and Sales 3. Trigger point is Finished Goods. Types of Backflush accounting 1/6/2020 9 Girish M C, Asst Prof of Commerce, Panampilly Memorial Govt. College, Chalakudy

10. Journal entry for D. Material purchase 1. RIP Control A/c or Raw and In-Process Control A/c To Account Payable Control A/C 2 . Entry for Incurred conversion costs during the reporting periods. Conversion Costs Control A/C To Wages payable A/C To Account Payable Control A/C 1. Trigger point are Material Purchase (including Components ) and Finished Goods 1/6/2020 10 Girish M C, Asst Prof of Commerce, Panampilly Memorial Govt. College, Chalakudy

11. 3. Recording of Std or Budgeted cost of finished goods completed in the reporting periods:- Finished goods Control A/C Dr. To Inventory or RIP control A/C( budgeted cost) To Conversion costs Allocated A/C 4. Entry for recording the cost of goods sold in the reporting periods. Cost of Goods Sold A/C Dr. To Finished Goods Control A/C Up to the point of finished goods produced , the costs have not been recorded synchronously with the flow of product along its production rout and W-I-P Control A/C has not been prepared instead, the out put trigger reach facts and pulls costs of finished goods produced from inventory : RIP Control and Conversion Costs. Because of this step the name given to this method of recording is backflush costing. 1/6/2020 11 Girish M C, Asst Prof of Commerce, Panampilly Memorial Govt. College, Chalakudy

12. Difference between the actual cost incurred and budgeted or std costs allowed for the actual production is known as Variance. Entry for Unfavourable variance. Material Price Variance Dr. Material Efficiency Variance Dr. To Inventory : RIP Control A/C Entry for unfavourable material variances ) (N.B reverse entry will be passed for favourable variances) The favourable ( i.e over allocated )and unfavourable ( i.e under allocated) Cost of conversion variance. Accounting for Variances 1/6/2020 12 Girish M C, Asst Prof of Commerce, Panampilly Memorial Govt. College, Chalakudy

13. A). Entry for unfavourable conversion costs variance. Conversion cost Variance Dr. To Conversion Cost Control A/C B) Entry for favourable conversion costs variance. Conversion Cost Control A/C Dr. To Conversion cost Variance A/C The favourable ( i.e over allocated )and unfavourable ( i.e under allocated) Cost of conversion variance. 1/6/2020 13 Girish M C, Asst Prof of Commerce, Panampilly Memorial Govt. College, Chalakudy

14. Material and conversion cost are generally written off to Cost of Goods Sold A/C. This treatment suitable for the firms have no inventories or very low inventories. Disposition of Variances 1/6/2020 14 Girish M C, Asst Prof of Commerce, Panampilly Memorial Govt. College, Chalakudy

15. In this method of accounting the first trigger point (Purchase of Materials) is same as in the first type. But the second trigger point is the sale and not the completion of the finished products. Second type treatment Trigger Points are Materials Purchase and Sales. 1/6/2020 15 Girish M C, Asst Prof of Commerce, Panampilly Memorial Govt. College, Chalakudy

16. Journal entry for D. Material purchase 1. RIP Control A/c or Raw and In-Process Control A/c To Account Payable Control A/C 2 . Entry for Incurred conversion costs during the reporting periods. Conversion Costs Control A/C To To Various Account such as To Wages payable A/C To Account Payable Control A/C 1. Trigger point are Material Purchase (including Components ) and Finished Goods 1/6/2020 16 Girish M C, Asst Prof of Commerce, Panampilly Memorial Govt. College, Chalakudy

17. 3. Entry for Cost of finished goods Sold:- Cost of Goods Sold A/C Dr. To Inventory or RIP control A/C( budgeted cost) To Conversion costs Allocated A/C 4. Entry for unallocated conversion cost and transfer of conversion costs allocated to Conversion Cost Control A/C Conversion costs Allocated A/C Cost of Goods Sold A/C Dr. To Conversion Costs Control A/C 1/6/2020 17 Girish M C, Asst Prof of Commerce, Panampilly Memorial Govt. College, Chalakudy

18. It is the simplest and the most extreme version of backflush accounting. It has only one trigger point for making entries . This accounting is mostly suitable for the JIT production system , where the zero inventory of materials and minimum possible W-I-P inventory . Only two entries are recorded . :- 1. Entry for the incurrence of conversion costs. 2. Entry for the budgeted or std cost of finished goods produced in the reporting period. Third type treatment Trigger Points is Finished Goods. 1/6/2020 18 Girish M C, Asst Prof of Commerce, Panampilly Memorial Govt. College, Chalakudy

19. 1 . Entry for Incurred conversion costs during the reporting periods. Conversion Costs Control A/C To Various Account such as To Wages payable A/C To Account Payable Control A/C 2. Entry for Finished goods :- Finished Goods Control A/C To Conversion Costs Allocation A/C 3. Trigger point is Finished Goods 1/6/2020 19 Girish M C, Asst Prof of Commerce, Panampilly Memorial Govt. College, Chalakudy

20. Thank You 1/6/2020 20 Girish M C, Asst Prof of Commerce, Panampilly Memorial Govt. College, Chalakudy