Backflush costing

Written by Fmi.Online Friday January 6, 2023
Backflush costing is an accounting system that waits until all of the production processes are completed before recording any direct material usages. In other words, as raw materials and work-in-process inventory are used during the production process, no journal entries are created to record these expenditures. Instead, one main journal entry is used at the end of the production process to record all of the inventory that was used during the manufacturing process.

Explanation : 

Since journal entries were not made as inventory was used, accountants must use standard or normal costing to work backward to assign costs to finished goods. In this sense, the costs associated with producing the products are “flushed back” in the cycle after the fact and assigned to the proper goods and categories. This costing system is particularly useful for more complex products that require many different stages of manufacturing. Normally, each stage of manufacturing would require a separate journal entry to keep track of costs throughout the production process. This can add up to hundreds of entries for a single product. Now imagine if the company produces a couple hundred products. It adds up to a ton of bookkeeping that is somewhat unnecessary.

Example :

Backflush costing shouldn’t be used for products that take a long time to produce. As more time goes by, it becomes more difficult to assign costs accurately. Think about it this way. You can easily look back at the cycle and assign costs to a product that was produced in one day, but a product that was made over the course of a year might be more difficult. Also, custom orders typically don’t use this system as management would have to create a separate bill for each set of materials used. This costing system is best used for processes with short production times that utilize just in time inventory systems.

In a nutshell:

  • Backflush costing is used by companies who generally have short production cycles, commoditized products, and a low or constant inventory.
  • Backflush costing is an accounting method designed to record costs under specific conditions. 
  • Backflush accounting is another name for backflush costing. 
  • Backflush costing can be difficult to do and not every company meets the criteria to conduct backflush costing.
Our Courses are designed to boost your career

Launch your career with Fmi’s Learning Pathway

Choose a learning pathway that best meets your needs and ambitions. Not sure which Fmi learning pathway is right for you? Explore our CareerBuddy videos for help and advice.

Investment banking pathway
  • courses-clock60+ hours
  • courses-desktop9 courses

Investment banking offers many exciting career opportunities for students. From Financial Analysts to Investment Management, and Sales & Trading to a wide range of roles in infrastructure such as IT, Risk or Compliance. This pathway is designed to help you understand the investment banking industry, the roles investment banks are recruiting for, and most importantly, help you to develop the practical skills you need to get into the industry and your preferred role whether this be as part of a school leaver, intern or graduate program.

FMI Online Student join-student-img2 FMI Online Student
55,000+ students currently enrolled
Global markets pathway
  • courses-clock70+ hours
  • courses-desktop10 courses

Global markets provide a range of important products and services to corporates, institutions and governments worldwide from executing trades and managing risk to providing quality research content. A key business area in all investment banks, global markets offers a wide range of career paths for students to consider across all functions and at all levels from school leavers to internships through to graduate programs.

FMI Online Student join-student-img2 FMI Online Student
85,000+ students currently enrolled
Asset management pathway
  • courses-clock50+ hours
  • courses-desktop8 courses

The asset management industry is a global industry worth over 100 trillion US dollars. It plays a crucial role in managing the assets of retail and institutional investors, offering a wide range of exciting careers in doing so. If you’re looking to forge a career in asset management, our Asset management pathway is perfect for you. We help you build the skills all asset managers are looking for and explore everything you need to know about the industry and the wide range of roles available in the sector

FMI Online Student join-student-img2 FMI Online Student
100,000+ students currently enrolled