BACKFLUSH COSTING

PRESENTED BY: KOPAL VOHRA MAYANK SHARMA SONALI HATWAL SUNEET SRIVASTAV

Backflush Costing
A unique production system such as JIT often leads to its own unique costing system. Organizing manufacturing in cells, reducing defects and manufacturing lead time, and ensuring timely delivery of materials enables purchasing, production, and sales to occur in quick succession with minimal inventories.

Backflush Costing
Traditional normal and standard costing systems use sequential tracking. Sequential tracking is any product-costing method where recording of the journal entries occurs in the same order as actual purchases and progress in production.

Backflush Costing
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.

Backflush Costing
Where journal entries for one or more stages in the cycle 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.

Describe different ways backflush costing can simplify traditional jobcosting systems

Trigger Points
The term trigger point refers to a stage in a cycle going from purchase of direct materials to sale of finished goods at which journal entries are made in the accounting system. A sequential tracking costing system would have four trigger points, corresponding to separate journal entries being made at different stages.

Trigger Points
Stage A: Purchase of direct materials Stage B: Production resulting in work in process Stage C: Completion of a good finished unit or product Stage D: Sale of finished goods

Trigger Points
Assume trigger points A, C, and D. This company would have two inventory accounts: Title Account Type 1. Combined materials Inventory: Raw and materials in work-inand In process inventory control 2. Finished goods Finished Goods Control

Trigger Points
What is the journal entry when trigger point A occurs? Inventory: Raw and In-Process Control XX Accounts Payable Control XX To record direct material purchased during the period

Trigger Points
What is the journal entry to record conversion costs? Conversion Costs Control XX Various accounts XX To record the incurrence of conversion costs during the accounting period Underallocated or overallocated conversion costs are written off to cost of goods sold.

Trigger Points
What is the journal entry when trigger point C occurs? Finished Goods Control XX Inventory: Raw and In-Process Control XX Conversion Costs Allocated XX To record the cost of goods completed during the accounting period

Trigger Points
What is the journal entry when trigger point D occurs? Cost of Goods Sold XX Finished Goods Control XX To record the cost of goods sold during the accounting period

Trigger Points
Assume trigger points A and D. This company would have one inventory account: Type Account Title Combines direct materials Inventory inventory and any direct Control materials in work-in-process and finished goods inventories

Trigger Points
What is the journal entry when trigger point A occurs? Inventory: Raw and In-Process Control XX Accounts Payable Control XX To record direct material purchased during the period.