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18/05/2018 10:05:58 AM

Backflush Costing

An alternative approach to sequential tracking is backflush costing. Backflush costing is a costing system that omits recording some of the journal entries relating to the stages from purchase of direct materials to the sale of finished goods. When journal entries for one or more 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 notmade. When inventories are minimal, as in JIT production systems, backflush costing simplifies costing systems without losing much information.Organizing manufacturing in cells, reducing defects and manufacturing cycle time, and ensuring timely delivery of materials enables purchasing, production, and sales to occur in quick succession with minimal inventories. The absence of inventories makes choices about cost-flow assumptions (such as weighted average or first-in, first-out) or inventory-costing methods (such as absorption or variable costing) unimportant: All manufacturing costs of the accounting period flow directly into cost of goods sold. The rapid conversion of direct materials into finished goods that are immediately sold greatly simplifies the costing system.

To enable costing, you must complete the following setup:

Set up WIP accounts for the production group and production flow

The WIP accounts for the production flow are specified in the production group. The backflush costing production flow calculates variances as the difference in the WIP value before and after backflush costing is run for each production flow. Therefore, we recommend that you create a WIP account for every production flow.

Assign a cost category to the resource group

You must assign a cost category to the run-time category of the work cell. To determine variances by activity, you should create a cost category for every work cell. The cost categories for setup and quantity aren't considered in costing for lean manufacturing. The WIP accounts per resource group are ignored in backflush costing. For subcontracted activities, no cost category is required. The cost group that is assigned to the active service is used instead.

Assign cost group

 To enable segmentation of the cost contribution in a production flow, you must assign cost groups by cost group type:

Direct material cost group - Direct material requires a cost group that identifies the material category for costing. This cost group enables an aggregated view of cost, WIP, and variances by direct material.

Direct manufacturing cost group - The direct manufacturing cost group captures the direct cost contribution of operational resources to the production flow. This cost group enables an aggregated view of cost, WIP, and variances by direct manufacturing cost.

Indirect cost group - The indirect cost group is required in order to calculate the indirect cost contribution to the production flow. This cost group enables an aggregated view of cost, WIP, and variances by indirect cost.

Direct outsourcing cost group - The cost group for the services enables an aggregated view of assigned cost and WIP, and determines the cost variances of the subcontracted services.

Cost group for a finished product - Finished products require a cost group that identifies the product category for costing. This cost group enables an aggregated view of cost, WIP, and variances by product category. The standard cost for products is calculated by using the cost calculation that is based on the bill of materials (BOM), and either the production flow and kanban rules or the route.

Work in process inventory, which is an asset, exists although it is not recognized in the financial accounting system. Advocates of backflush costing, however, cite the generally accepted accounting principle of materiality in support of the various versions of backflush costing. Backflush costing can approximate the costs that would be reported under sequential tracking by varying the number of trigger points and where they are located. If significant amounts of direct materials inventory or finished goods inventory exist, adjusting entries can be incorporated into backflush costing