Backflush costing is a nontraditional type of costing that complements just-in-time inventory systems.
Backflush costing is a lesser-known type of costing system. This is a type of costing system that is based on the philosophy that inventory is a not a value-adding activity. Most often backflush costing systems are seen as an integrated part of just-in-time (JIT) inventory systems. Due to the pull system involved with JIT inventory systems, backflush costing tends to work better than other traditional types of inventory systems.
What Is Backflush Costing?
Backflush costing varies from traditional costing systems in that it does not track costs in order; instead it delays the recording of certain costs. The process used in backflush costing complements just-in-time (JIT) inventory systems by making the process of costing simpler. This type of costing system may be used to complement activity-based costing for the same reason.
Although there are many variations of backflush costing, this type of costing generally eliminates the work-in-process account that is generally associated with most types of costing. Due to this and other variations from traditional costing methods, backflush costing may not be consistent with generally accepted accounting principles (GAAP), due to the fact that in most stages it may undervalue the inventory.
Procedures in Backflush Costing
The procedures in backflush costing may vary greatly from company to company, as there are various forms of this costing that can be used. Backflush costing may eliminate work-in-process accounts and instead flush all of the costs back at the end of the production run being costed. Backflush costing may also record raw materials at a standard cost when they are purchased, while recording conversion costs at their actual costs. Backflush costing is also used by eliminating the finished goods inventory account and instead recognize the finished goods at the point of sale.
When Is Backflush Costing Appropriate?
Backflush costing is most appropriate when used to complement a just-in-time inventory management system or to compliment an activity-based costing system. This is due to the fact that backflush costing simplifies the costing process in these situations. However, users of this type of system must keep in mind that it does not always conform to generally accepted accounting principles (GAAP) and that this type of system can be criticized because it does not leave a sequential audit trail.
In spite of these concerns, backflush costing may still be the most appropriate system for certain just-in-time inventory management situations. This is especially true if it is used in conjunction with activity-based costing.
