Backflush accounting is a manufacturing accounting system where the costing of a product and the inventory consumed are calculated at the point of completion of the manufacturing process.
Let us take a scenario at an automobile kitting plant. This kitting plant prepares the kit for the mirrors. At the assembly line each car requires one kit that is composed of the necessary components for the left, right and rear view mirrors. So each kit should contain 3 mirrors, 6 bolts, 6 washers, 6 spring washers and a zip lock pouch, this is also known as the bill of materials of the kit or BOM. The workers at the kitting plant draw these components from the stores and pack them in the zip lock pouch and make the kit. The inventory is deducted based on the BOM once the kit is completed. In a traditional setup, the inventory is deducted when the components are issued, but here the inventory is deducted at the point of completion based on the BOM. This reduces the quantum of transactions and the effort required in accounting.
Backflush accounting is normally used in Just-in-time and lean environments. It requires the following conditions for implementation.
1.Short Manufacturing Lead Time: Higher the manufacturing lead time, higher the inventory as work-in-process. Production processes that have larger lead time cannot use backflush accounting as it will create a huge gap between the physical and logical inventory.
2.Defect Less Environment: Defects will consume components that will not become part of the finished goods. If the defective parts are not accounted properly that will result in inaccurate inventory and under costing.
3.Product Layouts: Highly suitable for product based layouts where precise BOM and mass production are the norm. Hence not suitable for customized products.
4.Secure Environment: A highly secure facility where there is no scope for pilferages and thefts.
5.Accurate BOM: The bill of materials should be accurate to properly account the raw materials, components, work-in-process and MRO consumed.