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What is Backflush costing?

Backflush costing is  a  streamlined  cost  accounting method  that  speeds up, simplifies,  and minimizes  accounting effort  in  an environment  that minimizes  inventory balances,  requires  few  allocations, uses  standard  costs,  and has minimal variances from standard. During the period, this costing method records purchases of raw material and accumulates actual conversion costs. Then, at a predetermined trigger point such as (1) at completion of production or (2) on the sale of goods, an entry is made to allocate the total costs incurred to Cost of Goods Sold and to Finished Goods  Inventory using standard production costs.

The focus of accounting in a JIT system is on the plant’s output to the customer. Because each sequential activity in a production process is dependent on the previous activity, any problems will quickly cause the system to stop the production process. Individual daily accounting for the costs of production will no longer be necessary because all costs should be at standard, and variations will be observed and corrected almost immediately.

Additionally, fewer costs need to be allocated to products because more costs can be traced directly to their related output in a JIT system. Costs are incurred in specified cells on a per-hour or per-unit basis. Energy  is a direct production cost in a comprehensive JIT system because there should be a minimum of downtime by machines or unplanned  idle  time  for workers. Virtually  the only costs still being  allocated  are  costs  associated with  the  structure  (building  depreciation,  rent, taxes, and insurance) and machinery depreciation. The reduction of allocations provides more useful measures of  cost  control  and performance  evaluation  than have been traditionally available.
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