Backflush accounting

Hi,
Thanks for your message. Firstly although Ive answered your questions – the CIMA P2 syllabus does not specifically mention back flush accounting – this is a CIMA P1 topic (and always has been). Please see the 2015 syllabus for CIMA papers ( this is the current syllabus for 2016 and 2017).

However, it is true that you are expected to have all the knowledge acquired from P1 when you are sitting the P2 exam…. so here is a quick description

Backflush accounting is a method where the costs associated with producing a good or service are recorded only after the good or service has been produced.
Instead of making all the book keeping entries for every movement of inventory and each part of the manufacturing process – it assigns the total costs of inventory against the number of finished items. For this to work it needs a fast production process because during production inventory records will be out of sync.
It also needs accurate number of finished units and correctly incoming material records and scrap records – otherwise the cost per unit will be incorrect.
Ideally it is meant for a Just in time environment and may be reserved for just a few products rather than used as a comprehensive costing system.

In terms of the questions above – the thing that distinguishes back flush from other costing

a) Labour costs are not charged to the units produced. [this is true but same as throughput accounting so not a distinguishing feature.)
b)- Costs are attached when output is completed or sold. (This is true)
c)- Cost records reflect the flow of work through the production process. (costs are done at the end not throughout the process)
?d- Entries are not made until the customer pays for goods purchased. (this is incorrect goods are assigned the cost when the manufacturing is complete).

In terms of the disadvantages
a) -It may encourage managers to produce for inventory. (this is not true its a costing system designed for when inventory is minimal like in JIT)
b)- It may not be possible to use it for external reporting purposes. (This is true – like marginal costing its for internal use only and will need to have overheads allocated before using for external statutory reporting ).
c- It may require complex production controls. ( I don’t believe this is true- unless it is referring to having a tight control over wastage and incoming materials and production count.)
d- It may require complex allocation of overheads. (this is not true – this is referring to ABC which is another different modern costing method).

You’re welcome – that’s a good idea-prepare this topic – just in case 🙂

Kindest Regards,
Cath