Backflush is an issue that may not be known to many people, but it is beneficial to the inventory management process. If you want to save money and time in operating the production chain, don't ignore Backflush. So, what is backflush and what are its strengths? This article will discuss that with you.
A backflush costing system is defined as an automated product costing system commonly used in just-in-time (JIT) inventory systems. In simple terms, backflush serves as an accountant to record the costs associated with the production and activities involved in the completion and market sale of a product.
The backflush system will focus on providing information about work orders instead of all other costs like traditional costing systems. This makes the production process more efficient. The backflush costing system is also commonly referred to as backflush accounting.
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"Flush" costs at the end of the manufacturing process will save you time by not having to keep track of costs, such as labor and materials. This helps the company a lot by simplifying the cost tracking process, thus saving process and accounting costs.
But it will also limit the company's ability to track information that is related to costs in the manufacturing process, which can sometimes cause problems in the future. The total cost of the production process will be recorded for a certain time - the end of the process.
Therefore, businesses will apply the reverse charging method, this method mainly works in reverse, which means calculating the cost of the product after it has been completed, sold, and shipped. Goods of businesses will be assigned criteria. Sometimes the reality will be different from what was calculated, so companies need to recognize the difference between actual costs and standard costs.
For a product, there will often be costs calculated during different stages in a production cycle. Backflush costs will help simplify the accounting process by eliminating work-in-process (WIP) accounts.
In theory, backflushing is seen as a solution to save time and costs for companies by avoiding many of the complications associated with fixing costs for goods. At the same time, it also helps to simplify inventory control.
However, it should also be noted that using backflushing is not simple and it is not suitable for all companies. The absence of detailed statistics will sometimes cause some disadvantages later on. Therefore, be careful before applying backflushing to your company.
Basic information will be generated each time a production order is fulfilled. This information will include the delivery date, quantity requested, and item number. This list is then used to create a "pick list" or "parts list" and is also used as a route for that order.
There are a number of methods used by businesses to gather information about the ingredients needed at the start of a manufacturing process. The most commonly used method is to use parts lists to pick materials from where they come and ship those materials to the manufacturing facility.
Taking this approach benefits inventory management because the routing of components in a production order is done in software - convenient and fewer errors. Users will have full control over the ingredients included in the manufacturing process, how many ingredients are included, what ingredients are included, and more. During this stage, backwashing will be considered post-production. During backflushing, components will be released until the completion of production is reported.
After finishing the operation, the operator will enter the necessary information about the product into the production report software. Then the software will synthesize and give a report on the total quantity of goods and the amount of scrap, thereby obtaining the necessary data for the recalculation of the required component production quantity.
Through that report, the operator will supply the quantity of material they feel is sufficient for a transaction in the production line.
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For example, company A specializes in the production of electronic appliances. In collecting and recording labor costs and so on, they have many ways to do it. They can order electronic components for the year every March, the number of imported goods will be enough to use for the next 12 months to serve the production process. Or they can import electronic components once a month, each time will be enough for that month.
Not only that, company A can import components as soon as it receives orders from retailers. This idea will help the company reduce the cost of storing components used in production. This idea also forms part of just-in-time inventory management. While company A pays for the import of the raw materials, for example, in about 30 days, the manufactured product will probably be sold or at least finished. This gives the company more money to pay for the raw material costs. Company A is now using the total clearing method.
The Company will recognize the cost of labor, materials and other related expenses in the cost of goods sold and finished goods inventory. Finished goods inventory is accounted for at a specific point in time (e.g. completion, customer delivery, sales). From there, the backflush accountant will record very little information into Company A's Work in Process account.
Companies using backflush costs need to meet the following 3 requirements:
To ensure a successful backflush process, you need to ensure a few important things:
As a business owner, understanding what a backflush is will be important in optimizing the operations of your business. If you think it will help your business, then just try to apply it to your working set, from which you will learn from experience and know-how to improve to achieve higher efficiency in the future. Hope you have a good time with Efex.