What is Backflush Costing?
Anmethod whereby the costs associated with producing a good or service are recorded only after the good or service is actually produced, completed or sold.
Backflush Costing Example
For example, let's assume that Company XYZ manufactures widgets. It has a variety of choices in how it handles obtaining and recording the costs of its raw materials and labor. For example, it could order a year's worth of widget parts every January and warehouse them for use during the next 12 months of widget production. Or it could order widget parts once a month and warehouse them for use during each month's production. Or it could order widget parts only after it gets an order from a retailer, which minimizes the costs that Company XYZ will have to incur to store widget parts.
This last idea is part of the just-in-time method of cash on hand to pay those invoices.management. By the time Company XYZ has to pay the invoices for those raw materials (say, 90 days), it will have already sold or at least finished producing the widgets and will thus have much more
Accordingly, Company XYZ decides to use backflush accounting results in recording very little in a company's Work in Process accounts.
Why Backflush Costing Matters
Backflush costing is a more streamlined method for accounting principles and makes companies difficult to .for the costs to produce goods and services. Companies can measure the true and complete costs of a particular production run because they record all of the costs at once, at the end of the process, rather than before, during, and after the production process. This hastens the entire process considerably, but it comes at a price: Backflush typically does not conform to generally accepted
Because companies using backflush accounting essentially work backward by calculating the costs of products after they're sold, finished, or shipped (rather than before and during the production process, which is the typical method and is called sequential tracking), they often assign 'standard costs' to the units they produce. In the real world, companies that use backflush accounting eventually need to recognize the variances in standard costs and actual costs by, for example, comparing the amount of labor cost they assign to a production run with the actual payroll expense for that production run.