4.3 back-flush accounting and traditional process accounting Advantages of switching to back-flush accounting:
§ It is a simpler costing system resulting in lower accounting costs.
§ It avoids the need to record production costs sequentially as items move through step-by-step operations in the production process.
§ When inventory levels are low or constant, it yields the same results as traditional costing methods would.
Disadvantages of switching to back-flush accounting:
§ It provides less detailed management information than traditional costing system.
§ A more detailed audit trail is absent.www.examw.com
§ There are additional costs for stocktaking.
§ Extra training is necessary.
Other comments
§ It is therefore appropriate in a mature just in time (JIT) environment where there is a short production cycle, and inventories are low.
§ It is not appropriate for manufacturing environment where inventory levels are high, due to the problems of counting and valuing the inventory at the end of each period.
§ Controlling production is more difficult under back-flush accounting as detail and variance information is lost. Other aspects, such as non-financial target related to quality, need to be considered instead.
Test your understanding 12
Comment on the suitability of back-flush accounting for a major construction firm (which makes bridges, roads, buildings, etc.). |