Back flush costing is a costing method in accounting in which the cost associated with the production of goods is only recorded when the goods are actually produced, finished or sold. In this method of costing the goods or the products that are not accomplished yet are not recorded for costing.
Example of Back Flush Costing
In order to understand the concept of back flush costing let’s take an example of a company called ABC. The company has a wide range of methods and choices through which they record their costs related to labor, production and manufacturing. Assume that the company orders a net worth of a year’s usage widgets in January and use these widgets throughout the year until the manufacturing of the other lot of widgets for the next year. Another option for the company is that it can order the widgets required for use once a month and can warehouse them for the use during the next month. Another situation may be where the company only orders the production of the widgets when it receives an order from the retailer. The last situation will reduce the cost of storage that the company has to bear while storing the widgets in warehouse.
Consequently, Company XYZ decides to use back flush accounting, whereby it accounts the unrefined resources, labor, and other costs in its cost of goods sold and its finished goods inventory accounts at a predetermined point in the production process usually at the time of completion, sale, shipment to the customer, or similar things. Accordingly, back flush accounting results in recording very little in a company’s Work in Process accounts
Advantages of Back Flash Accounting
Back Flash accounting is one of the streamlined and appropriate methods of calculating cost of goods that are finished and completed.
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