Test your understanding 9

　　The Swiss watchmaker Swatch reportedly used target costing in order to produce relatively low cost watches in a country with one of the world’s highest hourly labour wage rates.

　　Suggest ways in which Swatch may have reduced their unit costs for each watch.

　　4.3 back-flush accounting and traditional process accounting

　　Advantages of switching to back-flush accounting:

　　§ It is a simpler costing system resulting in lower accounting costs.

　　§ It avoids the need to record production costs sequentially as items move through step-by-step operations in the production process.

　　§ When inventory levels are low or constant, it yields the same results as traditional costing methods would.

　　Disadvantages of switching to back-flush accounting:

　　§ It provides less detailed management information than traditional costing system.

　　§ A more detailed audit trail is absent.

　　§ There are additional costs for stocktaking.

　　§ Extra training is necessary.

　　Other comments

　　§ It is therefore appropriate in a mature just in time (JIT) environment where there is a short production cycle, and inventories are low.

　　§ It is not appropriate for manufacturing environment where inventory levels are high, due to the problems of counting and valuing the inventory at the end of each period.

　　§ Controlling production is more difficult under back-flush accounting as detail and variance information is lost. Other aspects, such as non-financial target related to quality, need to be considered instead.