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Hi!! All
Can anyone please tell what backflush accounting is. I tried everything i could do to understand but its of no use.I studied the text and even the F5 notes. But I haven’t understood what it exactly means and why it is used.
please help,
thanking u in advance- Topics: 0
- Replies: 111
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The normal flow of cost in the ledger is as follows:
Direct materials/Direct labour/Production overheads -> WIP -> Goods produced -> Cost of sales/Finished goods inventory.The balances in the Direct materials ledger, WIP ledger, and Finished goods inventory ledger will record the closing inventory for raw materials, WIP, and finished goods respectively.
In a pure just-in-time (JIT) production environment, there is no stock at all processes. Backflush accounting is a cut-corner approach by skipping all the ledger flows in between, i.e. Direct materials/Direct labour/Production overheads -> Cost of sales. Of course, there are variants of backflush accounting, depending on the level of JIT applied.
Finally, backflush accounting is not acceptable under GAAP by violating the requirement of a perpetual inventory system.
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