Backflush costing is appropriate for those establishments who generally are trying to retain inventories to the minimal level. In such environments, the recording of every slight increase in inventory value is deemed simply an expensive and non-value-added activity which that must be eliminated.
Backflush is easier and less costly than other conventional costing method which provides us with comprehensive information than other conventional costing methods. Benefit may be derived higher than cost involved in implementing Backflush Costing, in an industry. This method of Costing tries to eliminate non-value-added activities from costing systems.
Under JIT [Just-in-time] production process, work-in-process is typically less than the costs of goods manufactured and sold. Backflush Costing is a system that applies costs to products only when manufacturing is complete. Major advantages of Backflush Costing are:
• Help maintaining minimum inventories.
• Reducing defects and manufacturing lead time
• Enables procurement, manufacturing and sales on time
• Ensuring timely delivered of materials,
Noted benefits of backflush costing are as follows:
(a) This costing system would discourage managers from producing unnecessarily output for mere inventory piling since work-in-process does not add value until the finished product is completed or sold.
(b) In Backflush costing, the number of accounting entries required would significantly be reduced. Likewise, the supporting vouchers, documents and other things would also be reduced.
(c) Backflush costing is much simpler than any other methods since there is no separate accounting for work-in-process.
(d) Lower inventory results lower payment of financial cost of inventories.
(e) Maintenance issues relating to material inventory relief huge workforce to work on productive activities, thus saves money.
Backflush is unsuitable when manufacturing process is lengthy in nature. Again, it may also be unsuitable when the bill of materials contains not only piece commodities but also many parts with more or less variable use.