Backflush accounting is a cost accounting system which focuses on the end product of an organisation and so works backwards to impute costs to stock and cost of gross revenues.
This system records the dealing merely at the expiration of the production and gross revenues rhythm. The accent is to mensurate cost at the beginning and at the terminal with greater accent on the terminal or end products. Since back flushing is normally employed in analogue with JIT, there is no work-in-progress to considered nor, does work -in-progress materially fluctuate. What is indispensable, nevertheless, is an accurate measure stuffs goods steps of output by and large effectual production control and accurate technology alteration notice when outputs do alteration.
The rule of a just-in-time system is that production is pulled by client demand and this in bend pulls the buying processs. Therefore, theoretically there are zero stocks of natural stuffs. Work-in-progress and finished goods. For such a state of affairs to be at that place needs to be an first-class system of production planning ad communicating with stuffs providers.
The doctrine of traditional cost accounting methods
Traditional cost accounting methods are based upon the rule that value is obtained by the creative activity of the assets known as stock. As a effect this value must be measured and cost accretion systems are used for this intent. In modern JIT based production, stock does non be and therefore such cost accretion techniques are unneeded. Alternatively costs are recognized at the point of sale instead sunburn at the point of production.
The discrepancies of Backflush accounting
There are a figure discrepancies of the Backflush system, each differing as to the ‘trigger points ‘ at which costs are recognized within the cost histories and therefore associated with merchandises. All discrepancies, nevertheless, have the undermentioned common characteristics:
the focal point is on end product – costs are foremost associated with end product ( measured as either gross revenues or completed production ) and so allocated between stocks and costs of goods sold by working back.
Conversion costs ( labour and operating expenses ) are ne’er attached to merchandises until they are complete ( or even sold ) – therefore the traditional WIP history does n’t be. Materials are recognized at different points harmonizing to the discrepancy used, but merely to the extent of being either stock of natural stuffs or portion of the cost of stock of finished goods. Again, stuffs are non attached to WIP.
Two discrepancies of the Backflush system are summarized below. Note that in each as transition costs ( labour and operating expenses ) are incurred they will be recorded in a transition cost ( CC ) history.
This has tow trigger points ( TP ) :
TP 1 – purchase of natural stuffs / constituents. A ‘raw and in procedure ( RIP ) ‘ history will be debited with the existent cost of stuffs purchased, and creditors credited.
TP 2 completion of good units. The finished goods ( FG ) history will be debited with the standard cost of unit produced and the RIP and CC history will be credited with the criterion cost.
Under this discrepancy, so, there will be two stock histories:
natural stuffs ( which may, in fact, be incorporated into WIP )
This as merely trigger point – the completion of good units. The FG history is debited with the standard cost of units produced, with matching credits to the CC history and the creditors account.
Therefore the cost records exclude:
natural stuffs purchased but non yet used for complete production
the creditors for these stuffs ( and any monetary value discrepancy )
and there is merely stock history, transporting the standard cost of finished goods stock.
Other discrepancies include those utilizing the sale of complete goods units as a trigger point for the fond regard of transition cost to unit — therefore there is no finished goods history, merely a natural stuffs stock history, transporting the stuffs cost of natural stuffs, WIP and finished goods.
It should be seen that as stock of natural stuffs, WIP and finished goods are decreased to minimum degrees, as in a ‘pure ‘ JIT system, these discrepancies will give the same basic consequences.
Backflush accounting — illustration
The undermentioned illustration will be used to exemplify the first two discrepancy outlined above.
The fabrication cost information for March for a division of XYZ plc is as follows:
Cost incurred in March & A ; lb ; ‘000
Purchase of natural stuffs 4,250
Operating expenses 1,640
Activity in March Units ( ‘000 )
Finished goods manufactured during the period 180
Gross saless 145
Standard cost per unit & A ; lb ;
There were no opening stocks of natural stuffs, WIP or finished goods. It should be assumed that there are no direct stuffs discrepancy for the period.
Suitability of Backflush accounting
Both discrepancy illustrated above extinguish the WIP history. If stocks are low in general a big proportion of fabrication costs will be attributable to be of goods sold. Te rule of Backflush costing is that in these fortunes, the work involved in tracking costs through WIP, COGS and FG is unlike to be benefit. As celebrated above, the stock and cost of goods sold values will be near to those derived from a conventional costing system, with a well reduced volume of recorded minutess.
Another theory on Backflush Accounting
Traditional cost accounting systems track the sequence of natural stuffs and constituents traveling through the production systems, and as a effect are called ‘sequential trailing system ‘ As JIT is an wholly different system it requires its ain accounting system. The absence of stocks makes pick about stock rating systems unneeded and the rapid transition of direct stuffs into cost of goods sold simplifies the cost accounting system. The attack is know as Backflush accounting.
Backflush accounting delays the recording of costs until after the events have taken topographic point, so criterion costs are used to work backwards to ‘flush ‘ out the fabrication costs. There are two events that trigger the records kept in most Backflush accounting systems.
i‚· The first is the purchase of natural stuffs. In a true JIT system where perfectly no natural stuffs stock is held even this trigger is non relevant and natural stuffs are ‘flushed ‘ when the 2nd trigger is activated.
i‚· The 2nd trigger is either the transportation of goods to complete goods stock or, in a true JIT system, the sale of goods. Two illustrations of possible Backflush accounting systems are given below.
This is the system used by Toyota in its UK mill. In true Nipponese it manipulates employees to act in a certain manner. First employees must concentrate on accomplishing gross revenues because cost of gross revenues is the trigger-nothing gets recorded until the gross revenues is made. Second there is no benefit in bring forthing nutrients for stock. In traditional system which have a finished goods stock directors can increase in finished goods stock reduces the cost of gross revenues in traditional fiscal histories.
The theoretical account merely described may be to get by with in advancement in the system by utilizing a natural and in advancement history ( RIP ) in topographic point of the stock control account All other entries remain the same.
Table 2: System 2
No natural stuff stock is held but some finished goods is held.
The figures are the same as for system 1, but the transportation to finished goods is assumed to be & amp ; lb ; 6,000 and the cost of goods sold is & A ; lb ; 5,900 go forthing a finished goods stock of & A ; lb ; 100.
The Backflush accounting theoretical account can non be used by all administration. It can merely be used where a JIT type system is in operation. Where it is used it does hold advantages. The traditional system is clip devouring and expensive to run, as it requires a considerable sum of certification, such as stuffs requisitions and clip sheets to back up it in order to keep the WIP records and occupation cards. If a company operates with low stock degrees the benefits of runing the traditional costing system are few. By presenting a Backflush system a considerable sum of clerical clip is saved.
From the Backflush accounting illustrations it can be seen that JIT eliminates direct labor as cost class. Alternatively labor is treated as in indirect cost and is included in transition cost with the operating expenses. This is because production is merely needed when demand requires it and so production labor will be paid irrespective of activity. All indirect cost are treated as a fixed period disbursals. With JIT failed or make over must be about eliminated if the system is to work and so no histories for this will be in Backflush accounting whereas they are required in traditional systems.
The Backflush accounting theoretical account does non conform to the accepted fiscal accounting processs for external coverage in the UK. This is because work in advancement is treated as an assets in the sum does. This can be countered by claming, rather justly, immaterial. If merely one ten percent of one twenty-four hours ‘s production is held in work in advancement so it is immaterial. It can besides be claimed that it is immaterial if the work in advancement does non alter from one period to the following as gap and shutting stock will call off each other out.
Backflush accounting can be criticised because of the deficiency of information that it provides. Some argue rather justly, that in world it is impossible to extinguish all stock as a truck geting with natural stuffs creates stock until it is moved to an used in production. If Backflush accounting is used in a system where a significant sum of stock is held, a physical stocktake will be needed, because the system does non enter the measure of stock. Alternatively it is derived on paper by the difference between the standard cost of stuffs in the nutrients sold and the sum of stuffs purchased. This must be checked by a physical stocktake from clip to clip.