A back-flush accounting system
§ The cost of raw materials is allocated to a ‘raw materials and in progress’(RIP) account.
§ Conversion costs (labour and production overheads) are allocated straight to the cost of goods sold account.
§ At the end of the accounting period an inventory stock-take is carried out to determine closing balances for raw materials, WIP and finished goods. This is quick as there are few inventories. Inventory values are based on budget/standard costs.
§ The closing inventory values for raw materials and WIP are then ‘back-flushed’ from the cost of goods sold account into the RIP account.
§ Similarly the closing inventory value for finished goods is ‘back-flushed’ into the finished goods account.
§ Thus with back-flush accounting there will be a significant reduction in accounting costs albeit at the cost of reduced detail. (e.g. a split of conversion costs between production labour and overhead is not available).
§ However, as noted above, if the production cycle is short and there is only a small amount of WIP at any time, it is questionable whether there is much value in building up detailed cost records as items progress through production. This is key to back-flush accounting.
