Backflush Costing: Definition and How

System Works for Inventory

What Is Backflush Costing?
Backflush costing is a product costing system generally used in a just-in-
time (JIT) inventory system. 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. Backflush costing is also commonly referred to
as backflush accounting.

KEY TAKEAWAYS

 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. 

How Backflush Costing Works

“Flushing” costs to the end of the production run eliminates the detailed
tracking of expenses, such as raw material and labor costs, throughout the
manufacturing process, which is a feature of traditional costing systems. This
allows the company to simplify its expense tracking processes, thus saving
accounting and process costs, but it may also limit the detail of information
that the company retains related to individual costs for production and sales.

The total costs of a production run are recorded all at once, at the end of the
process. Companies using backflush costing, therefore, primarily work
backward, calculating the costs of products after they're sold, finished, or
shipped. To do this, businesses assign standard charges to the goods they
produce. Sometimes costs differ, so companies eventually need to recognize
the variances in standard costs and actual costs.

Usually, the costs of products are calculated during various stages of the
production cycle. By eliminating work-in-process (WIP) accounts, backflush
costing is designed to simplify the accounting process and save businesses
money.

Advantages and Disadvantages of Backflush Costing

In theory, backflushing appears to be a sensible way to avoid the many
complexities associated with assigning costs to products and inventory. Not
logging costs during the various production stages enable companies to save
time and reduce their expenses. Companies looking for ways to reduce their
bottom lines may use backflush costing, but it isn't always an easy accounting
method to implement.

 
The process of backflush costing makes it difficult for companies to audit
because it doesn't always adhere to the basic fundamentals of accounting. 

However, backflushing can also be challenging to implement and is not an

option available to all companies. Moreover, there are some other big
caveats: businesses that do backflush costing lack a sequential audit trail and
may not always conform to generally accepted accounting principles
(GAAP). 

Special Considerations
Companies using backflush costing generally meet the following three
conditions:

 Short production cycles: Backflush costing shouldn’t be used for

goods that take a long time to manufacture. As more time goes by, it
becomes increasingly difficult to assign standard costs accurately.
 Customized products: The process is not suitable for the fabrication
of customized products since this requires the creation of a unique bill
of materials for each item manufactured.
 Material inventory levels are either low or constant: When
inventories, the array of finished goods held by a company, are low, the
bulk of manufacturing costs will flow into the costs of goods sold, and it
is not deferred as inventory cost.