Question

How to overcome DISADVANTAGE of backflush when a company uses it regardless that their manufacturing process is complicated by factors such as multiple processes and outsourcing materials. By adopting the backflush method, the company in turn loses a sequential record of manufacturing activities. In the case of an audit against the company, this presents significant problems.

Answer 1

Backflush costing is used to minimize the costs of record keeping and save time.

This type of costing is suitable for companies which have a short production cycle as the costs are not ascertained till the product or service is finalised and sold to the end user.

The product line should be minimal. If there would be a lot of varieties of the product the costs need to be ascertained at each level of the production cycle. This would be a huge problem if there are too many varieties of the product, and the bottom line would not be maintained at optimum level.

Time is money. If the manufacturing process is long this method would not work as it would be difficult to assign standard costs to the products. The product, even if it has many processes, each process should be short and simple.

So if a company has multiple processes and are outsourcing materials, one thing they can do is to outsource from limited suppliers. If there are multiple suppliers, it would complicate the costs involved. Uniformity is key for Backflush costing to work.