What is Backflush Costing?

Backflush costing is a streamlined approach to recording the cost of production only after goods have been produced. In essence, no accounting transactions are recorded until all production has been completed, at which point all related raw materials are charged to a finished goods inventory asset. This approach is vastly less complex than the more traditional cost accounting approach, which is to record a transaction for each movement of raw materials from the warehouse to the production area, and then on to the finished goods storage area. In particular, there is no accounting for work-in-process, which is the set of transactions used to record everything occurring on the shop floor.

Backflush costing works especially well when the production process is relatively short, so there is only a minimal period of time when the accounting database does not accurately reflect the actual location of raw materials.

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How Backflush Costing Works

Backflush costing works backward from the point at which goods have just been completed. At that time, the number of units completed is multiplied by the related bill of materials to arrive at the standard amount of raw materials that should have been used during the production process. These raw materials are then deducted from the inventory records.

Several conditions are required before a business can reliably use backflush costing. First, its production process needs to be quite short. A long production process without any accounting recordkeeping makes it impossible to track inventory levels. Also, all of the goods being produced must be highly standardized, with a well-constructed bill of materials. Thus, it is not suitable for the production of customized goods.

Advantages of Backflush Costing

The key advantage of backflush costing is that it massively reduces the number of accounting transactions associated with the production process. By minimizing the amount of recordkeeping needed during the production process, the manufacturing staff has more time to concentrate on production activities, rather than having to deal with accounting paperwork. The result is a more efficient production workforce.

Disadvantages of Backflush Costing

There are several issues with backflush costing. The main one is that the bills of material for produced goods must be extremely accurate, or else the backflushing calculation will relieve incorrect amounts from the raw materials inventory records.

Another disadvantage is that accounting systems will still be needed to deal with anomalies in the production process, such as scrap and rework, that are not accounted for in the bills of material. Without this ancillary recordkeeping, the inventory records will be inaccurate. This means that the streamlined promise of backflushing varies somewhat from the actual amount of recordkeeping required.

A third concern is the lack of an audit trail through the production process, since accounting transactions are being inferred from what was produced, rather than being monitored in detail. This can be a problem for internal auditors and external auditors who are investigating the production process.