4 Back-flush accounting
4.1 The basic concepts of back-flush accounting
§ In traditional accounting systems inventory is a key item. Traditional manufacturing firms hold high levels of inventory for raw materials, work-in-progress (WIP) and finished goods.
§ Much of the work of the management (or cost) accountant would be to place a value on this inventory, e.g. using process cost accounting.
§ Back-flush accounting is an alternative approach to cost and management accounting that can be applied where:
- the speed of throughput (or ‘velocity’ of throughput) is high, and
- inventories of raw materials, WIP and unsold finished goods are very low.
§ Instead of building up product costs sequentially from start to finish of production, back-flush accounting calculates product costs retrospectively, at the end of each accounting period.
Illustration 7 – Targeting costs