Backflush in Finance

What is backflush?

This is a situation whereby a company's production process was first completed before the recording of all the related issuance from stocks used in the production process. Backflush is also used to avoid the strenuous process of manually recording the various stages in production. It is also used to avoid the detailed tracking of expenses like the cost of labor and raw materials used for the product. Backflush costing is also referred to as backflush accounting.

How Does Backflush Works?

  • In a backflush costing, the total amount used to run a production process is recorded when the product has been completed or about to be sold or shipped.

  • Backflush is done at the end of the production process.

  • To carry out a backflush account, the company calculates from the cost of production after they are completed, shipped or sold out. As a result, companies using backflush costing often assign standard prices to the goods produced. However, most times the standard cost of a product differs from its actual cost, in such a situation, companies are expected to know the actual cost of the product to avoid loss.

  • Usually, when running a backflush account, the cost of production is broken into stages.

  • Also by operating a one time record of the production process using the backflush accounting method, this would help to simplify the accounting process and also help the business save more money.

Advantage Of Using A Backflush Account

  • Backflush is an effective way to avoid the complex process of assigning a cost to inventory

  • It also helps the business to save time and reduce their expenses

  • Although using a backflush is not easy, it is an effective measure for companies that want to reduce their bottom line.

The disadvantage of using this method is that businesses operating this type of account usually lack a comprehensive audit trail and may not conform to the general accepted accounting principles (GAAP).

  • Special Considerations

There are three conditions guiding the use of backflush costing,

  • Short Production Cycle.

Backflush is generally conducive for a business whose production process is short and straight forward. It is not advisable to be used for a longer production cycle. This could lead to wrong assigning of costs.

  • Commoditized Product

Backflush should not be used for accounting customized products. This is because each item requires the creation of a unique bill for every material.

  • Low or constant inventory process

With backflush account, material inventory process is either low or constant.

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