Monday 27 February 2012

Backflush Costing and Kaizen Costing

Backflush Costing and Kaizen Costing




Backflush accounting is a product costing approach, used in a Just-In-Time (JIT) operating environment, in which costing is delayed until goods are finished. Standard costs are then flushed backward through the system to assign costs to products. This eliminates the detailed tracking of costs throughout the production process, which is a feature of traditional costing systems.

Definition

Method of costing a product that works backwards: standard costs are allocated to finished products on the basis of the output of a repetitive manufacturing process. Used where inventory is kept at minimum (as in 'just in time' operations) this method obviates the need for detailed cost tracking required in absorption costing, and usually eliminates separate accounting for work-in-process. Also called backflush accounting.

Journal entries to inventory accounts may be delayed until the time of product completion or even the time of sale, and standard costs are used to assign costs to units when journal entries are made, that is, to flush costs backward to the points at which inventories remain.

It can be argued that backflush accounting simplifies costing since it ignores both labour variances and work-in-progress. Backflush accounting is employed where the overall business cycle time is relatively short and inventory levels are low.

BackFlush accounting is inappropriate when production process is long and this has been attributed as a major flaw in the design of the concept.

Back flush is used for materials which are requires for the product and have a fixed relationship with the product.

By eliminating work-in-process accounts, backflush costing simplifies the accounting process. However, this simplification and other deviations from traditional costing systems mean that backflush costing may not always conform to generally accepted accounting principles (GAAP). Another drawback of this system is the lack of a sequential audit trail.


Just-in-time(JIT) production systems take ademand pullapproach in which goods are only manufactured to satisfy customer orders.



1 comment:

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