Backflush Costing
Traditional normal or standard-costing systems use
sequential tracking in which the recording of the
journal entries occurs in the same order as actual
purchases and progress in production.
As a reminder, the 4 stages are:
Purchase of Direct Materials & Incurring of
Conversion costs*
Production resulting in WIP
Completion of Good finished units of product*
Sales of finished goods*
* Indicates a trigger point for journal entries
20-2
Backflush costing omits recording some of the
journal entries relating to the stages from the
purchase of direct materials to the sale of finished
goods.
Because some stages are omitted, the journal entries for a
subsequent stage use normal or standard costs to work
backward to “flush out” the costs in the cycle for which
journal entries were not made.
20-3
Backflush costing does not necessarily comply
with GAAP.
However, inventory levels may be immaterial,
negating the necessity for compliance.
Backflush costing does not leave a good audit
trail—the ability of the accounting system to
pinpoint the uses of resources at each step of the
production process.
20-4
Traditional Backflush
1. RIP Inventory 1. Conversion Costs
AP Various Accounts
2. Conversion Costs 2. Costs of Goods Sold
Various Accounts AP
3. RIP Inventory Conversion Costs
Conversion Costs 3. RIP Inventory
4. Finished Goods Finished Goods
RIP Inventory Cost of Goods Sold
5. Cost of Goods Sold 4. AR
Finished Goods Sales
AR
Sales RIP = Raw and In-Process
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Backflush costing describes a costing
system that delays recording some or
all of the journal entries relating to the
cycle from purchase of direct materials
to the sale of finished goods.
Stage A: Stage B:
Purchase of Production resulting
direct materials in work in process
Stage C: Stage D:
Completion of good Sale of
units of product finished goods
Assume trigger points A, C, and D
This company would have two inventory accounts:
Type Account Title
1. Combined materials 1. Inventory:
and materials in work Raw and In-process
in process inventory Control
2. Finished goods 2. Finished Goods Control
What are the journal entries when trigger point A occurs?
Materials & In-Process Inventory Control XX
Accounts Payable Control XX
To record direct material purchased
Conversion Costs Control XX
Various accounts XX
To record the incurrence of conversion costs
What is the journal entry when trigger point B occurs?
No journal entry.
What is the journal entry when trigger point C occurs?
Finished Goods Control XX
Materials & In-Process Inventory Control XX
Conversion Costs Allocated XX
To record the cost of goods completed
What is the journal entry when trigger point D occurs?
Cost of Goods Sold XX
Finished Goods Control XX
To record the cost of finished goods sold
Conversion Costs Allocated XX
Cost of Goods Sold XX
Conversion Costs Control XX
To close underallocated conversion costs
Assume trigger points A and D
This company would have one inventory account:
Type Account Title
Combines direct materials
inventory and any direct Inventory Control
materials in work in process
and finished goods inventories
What are the journal entries when trigger point A occurs?
Inventory Control XX
Accounts Payable Control XX
To record direct material purchased
Conversion Costs Control XX
Various accounts XX
To record the incurrence of conversion costs
What are the journal entries to record work in process
(trigger point B) and the cost of goods completed
(trigger point C)?
No journal entries.
What is the journal entry when trigger point D occurs?
Cost of Goods Sold XX
Inventory Control XX
Conversion Costs Allocated XX
To record the cost of finished goods sold
Conversion Costs Allocated XX
Cost of Goods Sold XX
Conversion Costs Control XX
To close underallocated conversion costs
Another simplified product costing system that can be
used with JIT systems is lean accounting.
When a company utilizes JIT production, it has to
focus on the entire value chain of business functions in
order to reduce inventories, lead times and waste.
The improvements that result have led some
companies with JIT systems to develop organizations
structures and costing systems that focus on value
streams.
20-17
Value streams are all the value-added activities needed
to design, manufacture, and deliver a given product or
product line to customers.
Lean accounting is a costing method that focuses on
value streams, as distinguished from individual
products or departments, thereby eliminating waste in
the accounting process.
Tracing more costs as direct costs to value streams is
possible because companies using lean accounting
often dedicate resources to individual value streams.
20-18
Lean accounting is much simpler than traditional
product costing because calculating actual product
costs by value streams requires less overhead
allocation.
Critics of lean accounting charge that it does not
compute the costs of individual products, which
makes it less useful for making decisions.
Critics of lean accounting charge that it excludes
certain support costs and unused capacity costs.
A final criticism is that, like backflush costing, it does
not correctly account for inventories under GAAP.
20-19