advantages of back flush

Topics: Financial statements, Cost accounting, Balance sheet Pages: 2 (387 words) Published: March 15, 2014
Advantages of back-flush costing :

(a) It is much simpler, as there is no separate accounting for WIP.

(b) The number of accounting entries should be greatly reduced, as are the supporting vouchers, documents and so on.

(c) The system should discourage managers from producing simply for inventory since working on material does not add value until the final product is completed or sol

(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.

Adv. BF
Less entries are made-save time
Less costly=less documentation to be used/maintained
One of the drawbacks of backflush costing is that the strategy is not widely considered to be in compliance with generally accepted accounting principles. This is because the inventory is likely to be undervalued during the course of production, since the actual cost for recently arrived inventory is not posted until the production is finished. This situation is sometimes structured to allow the posting of a standard cost for the raw materials when they are purchased. There are also some objections to not recognizing the finished goods until the point of sale, rather than accounting for them in a finished goods inventory, as is the case with other accounting methods. While backflush costing does work well with a just-in-time inventory approach, the lack of detail can sometimes create issues during an audit of the...
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