The Challenges And Advantages Of The Backflush Accounting System

1106 Words 5 Pages
BACK-FLUSH ACCOUNTING
Costing systems have been augmented to reflect the manufacturing philosophy that is based on the need to achieve competitive advantage. According to modern manufacturing philosophy, flexibility is important to provide the customers with their wants at an exact time whenever it is required so as to achieve competitive advantage. This defines Just-In-Time (JIT) system whose objective is to produce or procure products or components as to when it is needed. Backflush Accounting (BA) otherwise known as backflush costing is defined as a more simplified costing system for allocating costs between stocks and cost of goods sold. To put it simply, BA is a system that delays recording some or all of the journal entries relating
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As mentioned earlier, BA affects the changes in cost structure with elimination of unnecessary activities related to supply, storage and handling of materials. We cannot deny the many advantages that comes with the implementation of backflush accounting. Firstly, it is much simpler and it saves time due to lesser entries that have to be entered in the accounting books as are the supporting documents and vouchers. There is no separate account for Work-In-Progress (WIP) in BA and everything is accounted for automatically via the computerised accounting in most manufacturing companies. Secondly, backflush accounting is all about producing and selling the products or services first. The system only takes account of the costs after what is left over when it has been sold. This is done instead of tracking the cost of products using an intricate costing system. For example, there is no holding cost in the way with organisations applying the JIT system. It can be concluded that BA is cheaper and less costly than conventional accounting …show more content…
A good and perfect operation of BA is unpredictable at times and despite its elegant execution, it is actually very difficult to implement. It is subjected to negative spotlight upon implementation to a point that organisations should take into account before making any decisions to take up BA. To begin with, it requires an accurate production count. The system does not register individual transactions and BA simply assumes modern manufacturing companies produce only pre-determined specifications. The number of finished goods produced is the multiplier in the backflush equation hence an incorrect amount will affect the amount of raw materials in the inventory. Next, it may not always conform to the Generally Accepted Accounting Principles (GAAP) as no system is perfect. Some thinks it should not be used for external reporting purposes. Using the politicisation concept, at times there is disagreements between members of the public regarding the usage of this system in an

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