Backflush accounting definition
/What is Backflush Accounting?
Backflush accounting is when you wait until the manufacture of a product has been completed, and then record all of the related issuances of inventory from stock that were required to create the product. This approach has the advantage of avoiding all manual assignments of costs to products during the various production stages, thereby eliminating a large number of transactions and the associated clerical labor.
Backflush Accounting Formula
Backflush accounting is entirely automated, with a computer handling all transactions. The formula for it is:
(Number of units produced) x (unit count listed in the bill of materials for each component)
= Number of raw material units removed from stock
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Problems with Backflush Accounting
Backflushing is a theoretically elegant solution to the complexities of assigning costs to products and relieving inventory, but it is difficult to implement. Backflush accounting is subject to the following problems:
Requires an accurate production count. The number of finished goods produced is the multiplier in the backflush equation, so an incorrect count will relieve an incorrect amount of components and raw materials from stock.
Requires an accurate bill of materials. The bill of materials contains a complete itemization of the components and raw materials used to construct a product. If the items in the bill are inaccurate, the backflush equation will relieve an incorrect amount of components and raw materials from stock.
Requires excellent scrap reporting. There will inevitably be unusual amounts of scrap or rework in a production process that are not anticipated in a bill of materials. If you do not separately delete these items from inventory, they will remain in the inventory records, since the backflush equation does not account for them.
Requires a fast production cycle time. Backflushing does not remove items from inventory until after a product has been completed, so the inventory records will remain incomplete until such time as the backflushing occurs. Thus, a rapid production cycle time is the best way to keep this interval as short as possible. Under a backflushing system, there is no recorded amount of work-in-process inventory.
Backflushing is not suitable for long production processes, since it takes too long for the inventory records to be reduced after the eventual completion of products. It is also not suitable for the production of customized products, since this would require the creation of a unique bill of materials for each item produced.
When to Use Backflush Accounting
The cautions raised here do not mean that it is impossible to use backflush accounting. Usually, a manufacturing planning system allows you to use backflush accounting for just certain products, so you can run it on a compartmentalized basis. This is useful not just to pilot test the concept, but also to use it only under those circumstances where it is most likely to succeed. Thus, backflush accounting can be incorporated into a hybrid system in which multiple methods of production accounting may be used.
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