Backflush Costing, Kaizen Costing, And Strategic Costing
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AN ASSIGNMENT ON BACKFLUSH COSTING, KAIZEN COSTING, AND STRATEGIC COSTING
SUBMITTED TO M. Takibur Rahman Lecturer Department of Accounting and Information System Faculty of Business Administration and Management
SUBMITED BY Shofiq Uddin Khan Roll No. 023; Reg. No. 00682 Level-3, Semester-1 Faculty of Business Administration and Management
Date of Submission: 25 March 2008
PATUAKHALI SCIENCE AND TECHNOLOGY UNIVERSITY 1
TABLE OF CONTENTS
SL. No.
Particulars
Page No.
01
Backflush Costing
03 - 04
02
Kaizen Costing
04 - 06
03
Strategic Costing
07 - 09
2
BACKFLUSH COSTING Definition of Backflush Costing Backflush costing is a traditional and standard costing systems track costs as products pass from raw materials, to work in progress, to finished goods, and finally to sales. Such systems are called ’sequential tracking systems’ because the accounting system entries occur in the same order as purchases and production. Sequential tracking is common where management desires to track direct material and labor time to individual operations and products. Backflush costing is a method of costing a product that works backwards: standard costs are allocated to finished products on the basis of the output of a repetitive manufacturing process. Used where inventory is kept at minimum this method obviates the need for detailed cost tracking required in absorption costing, and usually eliminates separate accounting for work-in-process. It also called backflush accounting. Backflush costing is in the Accounting and Auditing and Industries, Manufacturing, and Technology subjects. It is also an accounting system in which costs are applied to products when production is completed. Backflush accounting is a product costing approach, used in a Just-In-Time (JIT) operating environment, in which costing is delayed until goods are finished. Standard costs are then flushed backward through the system to assign costs to products. The result is that detailed tracking of costs is eliminated. Journal entries to inventory accounts may be delayed until the time of product completion or even the time of sale, and standard costs are used to assign costs to units when journal entries are made, that is, to flush costs backward to the points at which inventories remain. It can be argued that backflush accounting simplifies costing since it ignores both labor variances and work-in-progress. Backflush accounting is employed where the overall cycle time is relatively short and inventory levels are low. The implementation of a just-in-time philosophy necessitates changes. Backflush is a single step inventory process that typically occurs and the end of a production line. To trigger the transactions a Work Order or Kanban card with a bar code or RFID tag are used. When a product is packaged into a box or carton the operator wands the bar code. This triggers several events: ● A Carton Label is printed ● Open Quantity on the Work Order is reduced ● Materials on the bill of material are deducted from Raw Material Inventory ● Finished goods inventory is increased by the carton quantity and standard cost ● Cost of the Finished Goods is based on Standard Cost of materials, labor and overhead 3
Backflush costing describes a costing system that delays recording some or all of the journal entries relating to the cycle from purchase of direct materials to the sale of finished goods. Where journal entries for one or more stages in the cycle are omitted, the journal entries for a subsequent stage use normal or standard costs to work backward to flush out the costs in the cycle for which journal entries were not made. Backflushing simplifies costing and inventory transactions since it ignores both labor variances and work-in-progress. While in a true just-in-time environment there would be no work-in-progress at all, there will, in practice, be a small amount of work-in-progress at any point in time. It is important that standard costs are close to actual costs to keep inventory costing reasonable accurate. Back flush accounting is ideally suited to a just-in-time philosophy and is employed where the overall cycle time is relatively short and inventory levels are low. Material Variances are calculated regularly through physical counts and the resulting inventory adjustments. Labor Variances are calculated monthly by comparing the labor absorbed at standard cost to the actual payroll expenditures listed in the GL accounts. There are some differences between backflush costing and inventory costing system using sequential tracking. These are as followsTraditional normal and standard costing systems use sequential tracking, which is any product-costing method where recording of the journal entries occurs in the same order as actual purchases and progress in production. Backflush costing omits the recording of some or all of the journal entries relating to the cycle from purchase of direct materials to sale of finished goods. Where journal entries for one or more stages in the cycle are omitted, the journal entries for a subsequent stage use normal or standard costs to work backward to flush out the costs in the cycle for which journal entries were not made. Trigger Points of Backflush Costing Trigger point refers to a stage in the cycle from purchase of direct materials (stage1) to sale of finished goods (stage-4)
Traditional Trigger Points
Stsge-1
Stsge-2
Purchase of Direct Materials
Production of Work in Progress
Stsge-3 Completion of a Good Finished Units
Stsge-4 Sale of Finished Units
Backflush costing is an approach to costing which delays recording changes in the state of the products until the finished goods appear.
4
KAIZEN COSTING Definition of Kaizen Costing
A Standard System
A Kaizen Costing System
5
Kaizen Costing and Value Analysis
6
Choose of Perspective
Benefits of Kaizen Costing
7
STRATEGIC COSTING Strategic cost analysis, one of the most important activities for purchasing professionals, also can be one of the most daunting. In his book, The Power of Strategic Costing, Dale Brethauer states he will provide a step-by-step process for analyzing suppliers’ product or service costs, estimating competitors’ costs, setting target costs, and determining the value of continuous improvement. This practical book brings a potentially dry topic to life through interesting cases and helpful numerical examples. A disk with spreadsheet application is included to enable readers to begin using the cost estimating process with their own suppliers. Strategic cost management not only leads to incremental performance improvement but also to transformational change across the value chain. Strategic costing is viewed as part of a larger business process to influence decisions on pricing and profitability across several dimensions: product, customer, region, and distribution channel. Learn how your costing process aligns with industry best practices, and be on the leading edge of emerging practices such as value chain costing, shared services costing and outsourcing. Understand how German Cost Accounting and Resource Consumption Accounting are being put into practice. Activity-Based Strategic Costing System A review of the earliest activity-based strategic costing systems shows that several of them adopted an almost minimalist design approach and only added a small number of non unit-level cost pools to their existing traditional cost system. Yet these simple designs provided the additional insights that management required to support their strategic costing requirements. For example, Siemens Electric Motor Works added only two cost pools to its highly sophisticated, multi-cost pool, traditional unit-level system. The first cost pool captured the batch-level costs of processing an order and moving it through the plant. The second cost pool captured the batch-level costs of processing special components that were unique to custom motors. The new cost pools are more accurately referred to as process cost pools rather than activity cost pools. For example, at Siemens the first process dealt with normal batch-level activities and the second process with special component batch-level activities. Each of these cost pools contained the costs of several activities. For exampleThe first cost pool included the costs of ● Billing, ● Order receiving, ● Product costing and billing, and ● Shipping and handling. 8
In addition, the second cost pool included the costs of ● Inventory handling, ● Product costing and billing, ● Product development, ● Purchasing.
9
SUBMITTED TO M. Takibur Rahman Lecturer Department of Accounting and Information System Faculty of Business Administration and Management
SUBMITED BY Shofiq Uddin Khan Roll No. 023; Reg. No. 00682 Level-3, Semester-1 Faculty of Business Administration and Management
Date of Submission: 25 March 2008
PATUAKHALI SCIENCE AND TECHNOLOGY UNIVERSITY 1
TABLE OF CONTENTS
SL. No.
Particulars
Page No.
01
Backflush Costing
03 - 04
02
Kaizen Costing
04 - 06
03
Strategic Costing
07 - 09
2
BACKFLUSH COSTING Definition of Backflush Costing Backflush costing is a traditional and standard costing systems track costs as products pass from raw materials, to work in progress, to finished goods, and finally to sales. Such systems are called ’sequential tracking systems’ because the accounting system entries occur in the same order as purchases and production. Sequential tracking is common where management desires to track direct material and labor time to individual operations and products. Backflush costing is a method of costing a product that works backwards: standard costs are allocated to finished products on the basis of the output of a repetitive manufacturing process. Used where inventory is kept at minimum this method obviates the need for detailed cost tracking required in absorption costing, and usually eliminates separate accounting for work-in-process. It also called backflush accounting. Backflush costing is in the Accounting and Auditing and Industries, Manufacturing, and Technology subjects. It is also an accounting system in which costs are applied to products when production is completed. Backflush accounting is a product costing approach, used in a Just-In-Time (JIT) operating environment, in which costing is delayed until goods are finished. Standard costs are then flushed backward through the system to assign costs to products. The result is that detailed tracking of costs is eliminated. Journal entries to inventory accounts may be delayed until the time of product completion or even the time of sale, and standard costs are used to assign costs to units when journal entries are made, that is, to flush costs backward to the points at which inventories remain. It can be argued that backflush accounting simplifies costing since it ignores both labor variances and work-in-progress. Backflush accounting is employed where the overall cycle time is relatively short and inventory levels are low. The implementation of a just-in-time philosophy necessitates changes. Backflush is a single step inventory process that typically occurs and the end of a production line. To trigger the transactions a Work Order or Kanban card with a bar code or RFID tag are used. When a product is packaged into a box or carton the operator wands the bar code. This triggers several events: ● A Carton Label is printed ● Open Quantity on the Work Order is reduced ● Materials on the bill of material are deducted from Raw Material Inventory ● Finished goods inventory is increased by the carton quantity and standard cost ● Cost of the Finished Goods is based on Standard Cost of materials, labor and overhead 3
Backflush costing describes a costing system that delays recording some or all of the journal entries relating to the cycle from purchase of direct materials to the sale of finished goods. Where journal entries for one or more stages in the cycle are omitted, the journal entries for a subsequent stage use normal or standard costs to work backward to flush out the costs in the cycle for which journal entries were not made. Backflushing simplifies costing and inventory transactions since it ignores both labor variances and work-in-progress. While in a true just-in-time environment there would be no work-in-progress at all, there will, in practice, be a small amount of work-in-progress at any point in time. It is important that standard costs are close to actual costs to keep inventory costing reasonable accurate. Back flush accounting is ideally suited to a just-in-time philosophy and is employed where the overall cycle time is relatively short and inventory levels are low. Material Variances are calculated regularly through physical counts and the resulting inventory adjustments. Labor Variances are calculated monthly by comparing the labor absorbed at standard cost to the actual payroll expenditures listed in the GL accounts. There are some differences between backflush costing and inventory costing system using sequential tracking. These are as followsTraditional normal and standard costing systems use sequential tracking, which is any product-costing method where recording of the journal entries occurs in the same order as actual purchases and progress in production. Backflush costing omits the recording of some or all of the journal entries relating to the cycle from purchase of direct materials to sale of finished goods. Where journal entries for one or more stages in the cycle are omitted, the journal entries for a subsequent stage use normal or standard costs to work backward to flush out the costs in the cycle for which journal entries were not made. Trigger Points of Backflush Costing Trigger point refers to a stage in the cycle from purchase of direct materials (stage1) to sale of finished goods (stage-4)
Traditional Trigger Points
Stsge-1
Stsge-2
Purchase of Direct Materials
Production of Work in Progress
Stsge-3 Completion of a Good Finished Units
Stsge-4 Sale of Finished Units
Backflush costing is an approach to costing which delays recording changes in the state of the products until the finished goods appear.
4
KAIZEN COSTING Definition of Kaizen Costing
A Standard System
A Kaizen Costing System
5
Kaizen Costing and Value Analysis
6
Choose of Perspective
Benefits of Kaizen Costing
7
STRATEGIC COSTING Strategic cost analysis, one of the most important activities for purchasing professionals, also can be one of the most daunting. In his book, The Power of Strategic Costing, Dale Brethauer states he will provide a step-by-step process for analyzing suppliers’ product or service costs, estimating competitors’ costs, setting target costs, and determining the value of continuous improvement. This practical book brings a potentially dry topic to life through interesting cases and helpful numerical examples. A disk with spreadsheet application is included to enable readers to begin using the cost estimating process with their own suppliers. Strategic cost management not only leads to incremental performance improvement but also to transformational change across the value chain. Strategic costing is viewed as part of a larger business process to influence decisions on pricing and profitability across several dimensions: product, customer, region, and distribution channel. Learn how your costing process aligns with industry best practices, and be on the leading edge of emerging practices such as value chain costing, shared services costing and outsourcing. Understand how German Cost Accounting and Resource Consumption Accounting are being put into practice. Activity-Based Strategic Costing System A review of the earliest activity-based strategic costing systems shows that several of them adopted an almost minimalist design approach and only added a small number of non unit-level cost pools to their existing traditional cost system. Yet these simple designs provided the additional insights that management required to support their strategic costing requirements. For example, Siemens Electric Motor Works added only two cost pools to its highly sophisticated, multi-cost pool, traditional unit-level system. The first cost pool captured the batch-level costs of processing an order and moving it through the plant. The second cost pool captured the batch-level costs of processing special components that were unique to custom motors. The new cost pools are more accurately referred to as process cost pools rather than activity cost pools. For example, at Siemens the first process dealt with normal batch-level activities and the second process with special component batch-level activities. Each of these cost pools contained the costs of several activities. For exampleThe first cost pool included the costs of ● Billing, ● Order receiving, ● Product costing and billing, and ● Shipping and handling. 8
In addition, the second cost pool included the costs of ● Inventory handling, ● Product costing and billing, ● Product development, ● Purchasing.
9
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