Backflush Costing – Definition

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Backflush Costing Definition

Backflush costing is a product costing system that is normally used in a just-in-time (JIT) inventory environment. Backflush costing, also referred to as backflush accounting, is used to delay the costing process until the completion of the production of goods. The feature of a traditional costing system is eliminated by back flushing the costs at the end of production process and assigned to the goods.

A Little More on What is Backflush Costing

Amidst its consideration by many organizations, Back flushing has some limitations. The system lacks sequential audit trial, and through the process of simplification and deviations from traditional costing system, backflush costing may not always conform to generally accepted accounting principles (GAAP).

The three conditions that a company using backflush costing generally meets are: seeking of a simple accounting system by the management, a set of standard costs for every product and last but not least is that the material inventory levels are either low or constant.

Theoretically, backflushing is the preferred solution used by many complex organizations in assigning costs to products and inventories while on other hand it is difficult to implement. This is associated with the fact that back flushing is not ideal for extended production processes as well as not suitable for the fabrication of customized products.

References for Backflush

Academic Research on Backflush

  • JIT: Cost Accounting and Cost Management Issues [2], Foster, G., & Horngren, C. T. (1987). Strategic Finance, 68(12), 19. This article notes that just-in-time (JIT) has been implemented successfully by a number of Japanese companies and some of the United States (U.S) companies. According to the authors, JIT is more of a philosophy than an actual process and the philosophy part stresses on the performance of activities based on immediate demand.JIT is used in the manufacturing area and also as a procedure for helping companies manage and reduce their total processing times. This paper majors on the JIT process as it applies to the manufacturing industry and the following have comprehensively been discussed: JIT techniques applications majorly on the Kanban system, examples of US companies using JIT procedures, cost accounting implications associated with JIT, and the examination of the merits and the demerits of JIT.
  • A review of the Adoption of Just-In-Time method and its effect on efficiency. Younies, H., Barhem, B., & Hsu, C. E. (2007). Public Administration and Management, 12(2), 25. This study provides a review of the adoption of Just-In –Time (JIT) method and its effects on the efficiency of companies in the US manufacturing industry. The authors assert that JIT philosophy emphasizes the performance of activities based on demand. The applications of JIT systems have been examined, majoring on the Kanban system which was developed by Japanese.
  • From activity-based costing to throughput accounting, Macarthur, J. B. (1996). Strategic Finance, 77(10), 30. This article discusses the concept of Activity-Based Costing (ABC) and its role in product costing and long-run pricing. The author denotes that although ABC is a popular technique, certain companies prefer using simpler costing systems, particularly the Just-in-Time (JIT) production approach which is supported by backflush costing. The article further illustrates how Bertch Cabinet Mfg.; Inc. fully implements ABC technique in its systems.
  • Appraisal of Cost Management Tools in Manufacturing Organizations of Bangladesh, Fowzia, R., & Nasrin, M. (2011). World, 1(2), 83-94. This article illustrates how cost management tools are beneficial to manufacturing organizations through exerting control over cost and appraising managerial performance. The objective of the study was to examine the influence of different types of cost management tools in profit planning decisions. A total of seven cost management tools have been found to be beneficial; five are influential in profit planning decisions and three are important in overall satisfaction of cost management tools.
  • Effect of backflush accounting on financial performance of quoted food and beverage firms in Nigeria, Amahalu, N., Nweze, C., & Chinyere, O. (2017). This article examines the effect of Backflush accounting on financial performance of food and beverage firms quoted on Nigeria Stock Exchange from 2010 to 31st 2015 is performed by this study since that’s its objective. The ex-post facto research is the one used in this study. This research determines the cause-effect relationship among variables. Secondary data was used, and three hypotheses were formulated and tested in the course of this study. The result showed that the backflush accounting has a positive and statistically significant effect on the returns on food and beverage firms as quoted by the NSE at 5 percent level of significance. The researchers have recommended that manufacturing firms should adopt emerging trends even though it might not be cost effective.
  • Beware the new accounting myths, Calvasina, R. V., Calvasina, E. J., & Calvasina, G. E. (1989). Strategic Finance, 71(6), 41. This overview provides tangible evidence that JIT manufacturing companies that have improved in terms of costing system modification demonstrate higher performance compared to those JIT companies that have not made any changes. Results also indicate that use of non- financial performance indicators is related with the higher performance irrespective of the adoption of the production management system.
  • Cost accounting and performance measurement in a just-in-time production environment, Durden, C. H., Hassel, L. G., & Upton, D. R. (1999). Asia pacific journal of management, 16(1), 111-125.  According to this paper, companies that operate JIT production systems should change their cost accounting systems and focus on non-financial performance indicators. As such, it presents empirical evidence suggesting that JIT manufacturing companies that modify their costing system have higher performance than those that do not make such changes.
  • Informativeness, incentive compensation, and the choice of inventory buffer, Baiman, S., Netessine, S., & Saouma, R. (2010). The Accounting Review, 85(6), 1839-1860. This literature studies how the in formativeness and incentive properties of performance metric can be influenced by one particular organizational design choice. A manufacturing setting is modelled to enable an agent manage a workstation that processes intermediate units. The agent is paid on the basis of his workstation’s throughput. The conditions are characterized under which reducing the inventory buffer enhances the in formativeness of the performance metric.
  • The international diffusion of new management accounting practices: the case of India, Joshi, P. L. (2001). Journal of International Accounting, Auditing and Taxation, 10(1), 85-109. This paper examines the management accounting practices in a sample of 60 large and medium size manufacturing companies in India. Questionnaire was used as a technique to conduct this study, and the Indian results were compared with those of Australia that looked at the same factors. The results showed that Indians were highly adopting the traditional management accounting practices than the recently developed techniques. Indians majors mainly on rational practices in future and less in the new techniques since more benefits were derived from such techniques. The study also reveals that Australia and India have some differences in adopting the new practices; like in India, management in Australia avoids risk, is quite conservative, and less innovative.
  • Performance measurement and costing system in new enterprise, Gunasegaram, A., Williams, H. J., & McCaughey, R. E. (2005). Tec novation, 25(5), 523-533. This paper shows the description of a framework for measuring costs and performance in new forms of business organization that are coming up to meet the competitive challenges of today. The frame work emphasizes on various factors to enhance the competitiveness in global markets. Investing in the field where one has complete knowledge like information technology plays an important role in today’s competitiveness. Challenges can be possessed through managing and controlling costs in new forms of organizations.
  • Backflush costing and Backflush Accounting, Ramezani, A. R., & Mahdloo, M. (2014). Academic Journal of Research in Business & Accounting, 2(5), 1-6. This article illustrates the difference between Backflush Costing (BC) and Backflush Accounting (BA) where BC is in response to advances and innovations of production while BA has developed in response to the requirements of JIT manufacturing environment. There is no continuous tracking between the BA and BC. Also known as the delayed, BC is the simplest method of accumulating cost used by companies that adopted the JIT system and also it has a broader philosophy that concentrates on continuous simplification and reduction of loss and waste in levels of organizational activities.
  • Cost accounting and performance measurement in a just-in-time production environment, Durden, C. H., Hassel, L. G., & Upton, D. R. (1999). Asia pacific journal of management, 16(1), 111-125. ADVANCED COSTING METHODS AND THEIR UTILITY IN ORGANIZING MANAGEMENT ACCOUNTING., Maria, L. (2012). Young Economists Journal/Revista Tinerilor Economisti, 9(18). An empirical examination of cost accounting practices used in advanced manufacturing environments, Fullerton, R. R., & McWatters, C. S. (2004). In Advances in Management Accounting (pp. 85-113). Emerald Group Publishing Limited.

    Adoption and benefits of management accounting practices: an inter-country comparison, Yalcin, S. (2012). Accounting in Europe, 9(1), 95-110.

    Management accounting curricula: striking a balance between the views of educators and practitioners, Tan, L. M., Fowler, M. B., & Hawkes, L. (2004). Accounting Education, 13(1), 51-67.

    The just-in-time philosophy and the accounting implications, Varghese, S. (1993). (Doctoral dissertation, Victoria University of Technology).

    Positioning management accounting on the intellectual capital agenda, Cleary, P., Kennedy, T., O’Donnell, D., O’Regan, P., & Bontis, N. (2007). International Journal of Accounting, Auditing and Performance Evaluation, 4(4-5), 336-359.

    Management accounting practices in the Portuguese lodging industry, Santos, L. L., Gomes, C., & Arroteia, N. (2010).

    The development of management accounting and the Asian position, Nishimura, A. (2005). International Journal of Accounting Literature, 1(1), 51-71.

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