# 16.3.1 Actual Quantities, Actual Costs, and Backflush Costing

### Intended learning outcomes: Identify actual quantities and actual order costs. Produce an overview on backflush costing. Differentiate between standard costing, normal costing, and actual costing in determining actual order costs.

The actual quantities are the quantities of components and capacity used for an order.

The shop floor data collection system (see Section 15.3) provides the data on the actual quantities for a production, procurement, or R&D order. The actual quantities are generally used as a factor in calculating actual costs:

The actual order costs are the costs generated by an order.

In simple cases, we can determine the actual order costs as follows:

Backflush costing is the application of costs based on the output of a process. It works backward to flush out the costs for the units produced, applying costs using standard costs. Backflush costing is usually associated with repetitive manufacturing environments.

In all other cases, we determine actual order costs by an accumulation of job-order costs according to the following cost identification techniques:

• Standard costing or standard cost (accounting) system: actual (used or consumed) quantities times standard cost rates for variable and fixed costs.
• Normal costing or normal cost system: invoiced amounts or actual cost of wages for variable costs, actual (used or consumed) quantities times standard cost rates for fixed costs.
• Actual costing or actual cost system: invoiced amounts or actual cost of wages for variable and fixed costs.

We thus obtain a total for each of the individual cost types in corre­spondence to the cost accumulation breakdown shown in Figure 16.1.4.1. The algorithm for job-order costing corresponds to the procedure illustrated in Figure 16.2.2.1. Here, the data are taken from the business object order, rather than from the master data (see Section 17.1 for further details). In the costing method shown in Figure 16.2.2.1, the actual values are entered into the columns on an ongoing basis (ongoing job-order cost accumulation). The values listed correspond to usage by the reported operations and the parts issued. In this way, we can continuously track the costs of every production order and compare them against the target values. Continuous comparison is particularly important for production according to customer orders, since these are subject to a budget. This will identify the likely profit or loss at a relatively early stage, enabling us to take corrective action in good time.

For the comparison to be meaningful, the cost identification techniques used for cost estimating and job-order costing must be the same. However, for some types of costs, this may not be the case:

• For actual costing, the invoices for materials or external operations may arrive much too late for efficient control of internal operations. If this is the case, we can then fall back on the standard load or the actual quantities valued at standard cost rates.
• Global invoicing may sometimes make it difficult to assign costs fairly to individual resources obtained externally, which means that standard cost rates may prove to be just as accurate. These standard cost rates are again multiplied by the actual quantities.
• The valuation of material costs on the basis of standard cost rates may be inaccurate due to large fluctuations in the cost of purchased items. Under these circumstances it may be necessary to use the average costs as a basis or to value certain materials at the actual cost of the procurement batches.

If actual costing is chosen as the cost identification technique, then the estimated-cost accumulation essentially reflects the most recent order. We may, however, impose a budget on the individual cost types that does not necessarily correspond to the total standard costs for the underlying operations or individual items issued. If the budgets correspond to the expected revenue, then the ongoing comparison of estimated cost (budget) against job-order cost accumulation leads directly to the expected revenue from the order.