Reference no: EM13936775
Backflushing.
The following conversation occurred between Nicos Stavrou, plant manager at Sarantis Engineering, and Thanasis Bakogiorgos, plant controller. Sarantis manufactures automotive component parts such as gears and crankshafts for automobile manufacturers. Stavrou has been very enthusiastic about implementing JIT and about simplifying and streamlining the production and other business processes.
Stavrou: Thanasis, I would like to substantially simplify our accounting in the new JIT environment. Can't we just record one accounting entry at the time we ship products to our customers? I don't want our staff to be spending time tracking stock from one stage to the next, when we have as little stock as we do.
Bakogiorgos: Nicos, I think you are right about simplifying the accounting, but we still have a fair amount of raw material and finished goods stock that varies from period to period depending on the demand for specific products. Doing away with all stock accounting may be a problem.
Stavrou: Well, you know my desire to simplify, simplify, simplify. I know that there are some costs of oversimplifying, but I believe that, in the long run, simplification pays big dividends. Why don't you and your staff study the issues involved and I will put it on the agenda for our next senior plant management meeting?
Required
1. What backflush costing method would you recommend that Bakogiorgos adopt? Remember Stavrou's desire to simplify the accounting as much as possible. Develop support for your recommendation.
2. Think about the three examples of backflush costing described in this chapter. These examples differ with respect to the number and types of trigger point used. Suppose your goal of implementing backflush costing is to simplify the accounting, but only if it closely matches the sequential tracking approach. Which backflush costing method would you propose if:
a. Sarantis had no raw materials or work-in-progress stocks but did have finished goods stock?
b. Sarantis had no work-in-progress or finished goods stocks but did have raw material stock?
c. Sarantis had no raw material, work-in-progress or finished goods stocks?
3. Backflush costing has its critics. In an article in the magazine Management Accounting, entitled ‘Beware the new accounting myths', R. Calvasina, E. Calvasina and G. Calvasina state:
The periodic (backflush) system has never been reflective of the reporting needs of a manufacturing system. In the highly standardized operating environments of the present JIT era, the appropriate system to be used is a perpetual accounting system based on an up-to-date, realistic set of standard costs. For management accountants to backflush on an actual cost basis is to return to the days of the outdoor privy. Comment on this statement.
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