Backflush CostingDefined with Examples & Entries

Written By:
Lisa Borga

What is Backflush Costing?

Backflush costing is a type of product costing system in which the costing process is delayed until the production of goods is completed, a service is completed, or a product is sold.

This type of costing is most common in a just-in-time inventory environment.

Backflush costing can be easier and more economical because businesses do not have to report each expense as it occurs.

Instead, the business records all of the expenses in one entry after the completion of the production process.

How Backflush Costing Is Used

If a company wants to use backflush costing, they will need to estimate the cost of producing each unit of a specific product and then assign this cost as the standard cost per unit for the specific product.

Once the production cycle is completed, the business will multiply the number of units that have been produced by the standard cost per unit to find the expense that they will record in their journal entry.

The business will record the journal entry once the production cycle is completed.

As an example, suppose there is a manufacturing company that produces a product for $10 per unit.

The company produces 3000 units of this product.

The company would then record a journal entry for $3000 when the production cycle was completed.

When Should Backflush Costing Be Used?

Businesses that do not keep a lot of inventory on hand and tend to have a very high turnover in their inventory are more likely to use backflush costing.

This type of costing works better for these companies because the costs will still be recorded close to the time in which the company incurs the costs.

Generally, businesses that have a slow turnover rate for their inventory record their costs as they occur due to the fact that their products tend to take longer to sell.

Backflush costing is a good method for businesses that have a lot of different costs in their production process.

It works well in this situation because it can make the business’s accounting process much easier.

Because of this, this method of accounting is popular with companies that have a complex production process.

Whereas businesses that produce more customized products tend to find that backflush costing does not work very well for them due to the fact that unit costs for the products generally vary.

Pros and Cons of Backflush Costing

Backflush costing makes it easy for businesses to assign production costs to the associated inventory.

This is due to the fact that the business will only need to make one journal entry at the end of the production cycle for all of the costs associated with the specified product.

This tends to save the business a lot of time and money.

But, businesses that have slow inventory turnover rates generally won’t be able to use backflush costing.

This is due to the fact that the business would not be able to record the costs close enough to the time they are incurred.

Additionally, the backflush costing method does not always conform to generally accepted accounting principles.

Because of this, it is not always possible to use backflush costing.

This accounting method can also make it more difficult to audit a business.

If a company using backflush costing is audited, it can be difficult to determine which costs are associated with a certain product.

When businesses use backflush costing, they assign a standard cost to each unit of a product.

But, this standard cost isn’t always accurate and may need to be adjusted in later accounting entries.

Backflush Costing Journal Entry

Businesses will record one journal entry at the end of the production cycle using the standard cost and the number of units produced when they are using backflush costing.

Below is a typical journal entry for backflush costing and multiple entries using a standard accounting method.

Backflush Costing

Multiple Entries

These entries show how a business can save time by using backflush accounting.

Example

A business would like to use backflush accounting for recording the costs of manufacturing a new model of speaker.

The standard cost per unit for the speaker is $100, and the company intends to manufacture 500 speakers.

They purchased parts costing $20,000 for the production process on March 7, $15,000 on March 15, and $15,000 on March 22.

They finished the production of the stereos on March 31.

If the company uses backflush costing.

They would record a debit of $50,000 to expenses and a credit of $50,000 to cash on March 31.

Key Takeaways

• With backflush costing, also known as backflush accounting, costs are recorded once a good has been sold or a service has been completed.
• Businesses that have many costs in their production process tend to find backflush costing particularly useful. However, backflush costing does not tend to work well for companies that sell products that can be customized.
• Backflush costing is a method in which a standard cost per unit is used, and this cost is multiplied by the number of units that have been produced in order to calculate the amount of the expense.