Backflush Accounting - Meaning of Backflushing

Meaning of Backflushing

Backflushing is automatic accounting of material consumed for production, at the time of confirmation of the production, e.g. when a 4 wheeler automobile is rolled out from assembly line, 4 wheels and tires are deemed to be consumed and issued to production order automatically by way of back flushing by the system. Typically the assembly line has its own limited stock of materials as work in progress. This stock is replenished by transferring materials from a warehouse (store) into the assembly lines own designated location, e.g. a supermarket. At goods receipt the consumed materials are posted automatically from the location designated to the issuing production line. In other words, back flushing refers only to materials which are already withdrawn from the inventory of the warehouse and were delivered to the shop floor. Parts are issued from stores to Work-In-Process inventory, but not based on a job order or for a specific production order. They are issued in quantities estimated to cover require­ments of individual work centers and production lines. The issue may be used to cover a period of time or to fill a fixed—size container. But unlike the traditional approach, also known as "preproduction issuing" where the costs are assigned to the product order at the withdrawal of materials from the stores and after completion of production any excess material is given back to the stores, backflushing delays that until the goods receipt of the finished product or assembly is issued. The remaining quantity of unused material left on the shops is still held in the system as floor stock and so material will not be ordered incorrectly through the Manufacturing resource planning (MRP). By eliminating work-in-process accounts, backflush costing simplifies the accounting process. However, this simplification and other deviations from traditional costing systems mean that backflush costing may not always conform to generally accepted accounting principles (GAAP). Another drawback of this system is the lack of a sequential audit trail.

Back flush is used for materials which are required for the product and have a fixed relationship with it. Depending on how backflushing is implemented in the accounting software being used and depending on organizational rules, the back flushing may create backlogs which need to be analyzed by someone in charge for the cost accounting. One possible reason for the creation of a backlog can be that there is no sufficient stock available in the designated back flushing location. By simply deleting the backlog, without working it out, could mean that the costs are not assigned correctly to products and/or even that the expenses in the financial accounting (inventory accounts) are not being recorded. The backlog itself, is not a specific consequence of using back flushing. It may exist also when a MES system is being used. This backlog is also a kind of error log because any error in transmitting and/or interpreting the data being sent by the MES system to the ERP system is consigned and needs to be worked out. Any scrap, material usage variance (using more or less than specified in the BOM) or substitution must be reported separately in order to maintain acceptable inventory accuracy. These are typically implemented as unplanned transactions. The downside of unplanned transactions is that they are prone to error. Unplanned inventory transactions must be eliminated and replaced creatively with planned transactions because even a very low percentage of misreported transactions will take inventory accuracy quickly to an unacceptable level. That is why the usage of backflushing is recommended only if 2 conditions are met: low I/O Variation and low Production Lead Times. Without low part I/O variation through low scrap, non-standard usage, and substitution, system inventory levels become unreliable. The exception transactions just cannot come through quickly or accurately enough to tame the beast. Loss of trust in the system occurs. Without short manufacturing lead times, components get moved into production but don’t get relieved right away from the ERP inventory. This leads to confusion. Evident discrepancies between physical and system inventory counts cause frustration and lack of trust in the system. Without accurate and timely inventory levels, internal production plans and external purchase orders cannot be scheduled effectively, leading to inventory shortages and excess inventory. Inventory shortages cause disruptions to the manufacturing schedule, forcing additional setups, forced substitutions, overtime, premium freight charges, missed shipments and lost capacity. Excess inventory increases obsolescence, and consumes precious cash flow and shelf space. Both excess inventory and shortages can indirectly lead to poor quality. A plant cannot cycle-count its way to accurate inventories. Cycle counting is not timely enough to be of benefit. And cycle counts are more likely to introduce errors than to correct them.