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.
