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Possible problems with back-flush costing are as follows:
The successful operation of back-flush costing rests upon predictable levels of efficiency and stable material prices and usage. In other words there should be insignificant cost variances.
The successful operation of back-flush costing rests upon predictable levels of efficiency and stable material prices and usage. In other words there should be insignificant cost variances.
(a) It is only appropriate for JIT operations where production and sales volumes are approximately equal.
(b) Some people claim that it should not be used for external reporting purposes. If, however, inventories are low or are practically unchanged from one accounting period to the next, operating income and inventory valuations derived from back-flush accounting will not be materially different from the results using conventional systems. Hence, in such circumstances, back-flush accounting is acceptable for external financial reporting.
(c) It is vital that adequate production controls exist so that cost control during the production process
is maintained.
