This is a costing system that applies cost to products only when production is complete. Linking cost to work in progress and finished goods involves complex procedure (see para 7.2.2). So this system suggests not to charge any cost to work-in-progress inventory or finished goods stock.
Back flush costing has only two categories of costs: materials and conversion costs. Actual materials costs are recorded in materials inventory account and actual labour and overhead costs are recorded in conversion cost account. Costs are transferred from materials inventory and conversion cost account to finished goods inventory. Since back flush costing approach ignores work in progress and finished goods inventories, the cost of goods sold is overloaded with inventory cost.
Only in the Just In Time (JIT) production system, the W.I.P, raw materials and finished goods inventory levels are very small. Back flush costing may be used under such circumstances.
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