Learning Objective 9

Backflush Costing

What is backflush costing?

It is an accounting system that applies costs to products only when the production is complete.

2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 14 - 1

Principles of Backflush Costing

Backflush costing has only two categories of costs: Materials Conversion

There is no work in process account.

2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 14 - 2

Backflush Costing Example

Speaker Technology, Inc., recently introduced backflush costing and JIT. Model AX27 Standard material cost: $14 Standard conversion cost: $21 Actual production for the month: Actual materials purchased: Actual conversion costs: 400 units $5,600 $8,400

2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 14 - 3

Backflush Costing Example

Materials Inventory 5,600 Accounts Payable or Cash To record material purchases Conversion Costs 8,400 Accrued Wages To record conversion costs incurred

5,600

8,400

2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 14 - 4

Backflush Costing Example

Finished Goods Inventory 14,000 Material Inventory 5,600 Conversion Costs 8,400 To record costs of completed production Cost of Goods Sold 14,000 Finished Goods Inventory 14,000 To record costs of 400 units sold
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 14 - 5

Backflush Costing Example

The Finished Goods Account can be eliminated. Cost of Goods Sold Material Inventory Conversion Costs 14,000 5,600 8,400

Cost of Goods Sold 200 Conversion Costs 200 To recognize underapplied conversion costs
2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 14 - 6

The End

End of Chapter 14

2008 Prentice Hall Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahler 14 - 7