Backflush

ACCA F5 - Performance Management 

Remember all those hassles we went on accounting inventory, labor and overheads in paper F2. Traditional accounting system adopts product push strategy and holds huge amount of raw material, work in progress and finished goods, which amount to significant value in financial statement. Therefore, under traditional accounting system it is important to calculate value of work in progress account. What would the situation be if there were zero work in progress. Backflush is simplified accounting system applicable to organisation operating under "just in time environment" where, there is zero or insignificant amount of work in progress, which we can neglect when costing value of finished products.

Backflush accounting simplifies accounting system. It is appropriate for costing products for short accounting period. It assumes that there is insignificant or no opening stock of material, closing stock of finished goods and work in progress (i.e. raw material and conversion costs). Conversion costs include labor and overhead costs.

Oversimplifying; Where there is zero opening stock, closing stock and WIP, all the goods produced for the period are result of cost incurred for the period in material, labor and overhead. Now, there are no hassles of recording costs sequentially, in order to calculate cost of product. Manager at any time can pull periodic costs and production figure from account books and calculate unit cost based on sales figure for the period.

Where there is insignificant value of opening stock, closing stock and WIP, we flush-back the value of opening inventory, WIP and closing stock to arrive at cost for sales figure. As simple as is said.

First, create normal raw material, cost of goods sold, sales and other required accounts.

Then, flush back any adjustment to be made (i.e. for opening, closing and WIP raw material and conversion).

Finally, calculate cost of sales and profit.

The following lines are adopted from the article Page 6

In backflush accounting, costs are not associated with units until they are completed or sold. Backflush accounting is sometimes are delayed costing, which is a helpful name, as costs are not allocated to production until after events have occurred.

ACCA Article: Throughput and Backflush