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Just in Time

Just-in-time (or JIT) is an inventory management method in which you keep as little inventory on hand as possible. This document tackles this particular topic and an in-depth discussion and solving process regarding it,

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Henry See
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116 views3 pages

Just in Time

Just-in-time (or JIT) is an inventory management method in which you keep as little inventory on hand as possible. This document tackles this particular topic and an in-depth discussion and solving process regarding it,

Uploaded by

Henry See
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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JUST IN TIME AND BACKFLUSH COSTING

Just In Time Control System


The JIT control system is based on a philosophy that inventory is undesirable. Subscribers to the JIT philosophy
believe inventory reductions expose organizational problems and inefficiencies. These problems and inefficiencies
may not be brought to management's attention if inventories are not pushed to lower and lower levels. They would
remain hidden and undetectable at higher levels of inventory.

Three Primary Goals of Just in Time Philosophy


1. Elimination of any production process or operation that does not add value to the product or service.
2. Continuous improvement in production/performance efficiency.
3. Reduction in the total cost of production/performance while increasing quality.

JIT Push Inventory Control System


Larger levels of inventory exist by design in push production control systems. The inventory buffers permit lower
levels of communication between business segments, permit longer production runs, and protect the firm from
environmental uncertainties and unforeseen interruptions in production or supplies.

Meaning of “Pull” in the context of production control


Pull simply refers to the fact that the pace and level of production are geared to product demand. Each work center
sets the pace for the next upstream work center. Customer demand paces the final downstream work center.

JIT and Supplier Relationship


The JIT manufacturer will limit the number of suppliers to a few. Long-term contracts are entered into with
suppliers. Suppliers' raw material must be top quality with no defects.

Small quantities of raw material are delivered frequently and little or no raw material is maintained by the buyer.

Suppliers must be located close enough to the JIT buyer to deliver small quantities very quickly. The supplier must
agree to providing a top-quality product to its JIT customer.

The Importance of Proximity with supplier under the JIT System


The geographical proximity is important to minimize shipping and handling costs of supplies and materials.
Geographical proximity also facilitates frequent communication and joint planning between a supplier and
customer.

The Necessity of Adjustments to the Accounting System


JIT production control systems foster automation and reduced levels of inventory. Consequently, raw material
inventories and direct labor costs may be too small to warrant separate cost pools-they can be combined
with other cost pools.

Additional adjustments may be necessary to accommodate standard costs, which are constantly adjusted to reflect
the latest technological changes in production methods. Also, more costs could be traced to specific products and
fewer costs would have to be allocated.

 BACKFLUSH COSTING
Backflush costing is an accounting method that relies on post-deduction approach to establish inventory figures.
Backflush is employed under JIT systems wherein inventory turn-over is fast and inventory levels are low. A
distinctive feature of this costing method includes the following:
1. Merger of the raw materials account and the work-in-process account into Raw and In Process account.
2. Conversion costs are expensed to cost of goods sold.
3. Estimation of inventory balances at year-end and end-period adjustments of the accounts to reflect the
estimates.
Illustration:
Robotic, Inc. employs a JIT system hence inventory takes only a maximum of 2 days in production. Robotic, Inc.
backflush raw materials cost from the raw and in progress accounts to finished goods, and from finished goods to
cost of goods sold based on monthly physical count. Direct labor and conversion costs are expensed to the cost of
goods sold account.

January 1 January 31
Raw and in process P 21,000 P 23,000
Finished goods 170,000 174,000
Supplies 20,000 5,000

The RIP, beg consisted of P20,100 cost of materials, most of which were not yet in process, plus a P900 conversion
cost estimate assigned to partially processed work. The finished goods balance consisted of P84,000 material cost
and an P86,000 estimate of conversion cost.

The RIP, end is composed of P21,600 cost of materials which were not yet in process, plus a P1,400 conversion cost
estimate assigned to partially processed work. The finished goods amount consisted of P85,800 cost and an
P88,200 estimate of conversion cost.

The following transactions occurred during the year:


1. Received a P406,000 direct material from suppliers on account.
2. Issued P15,000 indirect material (supplies) into production.
3. Gross payroll of P160,000 is incurred.
4. The payroll is distributed as follows:
a. Direct labor, P25,000
b. Indirect factory labor, P45,000
c. Marketing salaries, P50,000
d. Administrative salaries, P40,000
5. Other factory overhead cost of P300,000 were incurred

The following T-accounts splitting inventories into its components are shown:

RIP – materials FG – materials


P 20,100 P 21,600 P 84,000 P 85,800
(1) P 406,000 404,500 404,500 COGS 402,700

RIP – conversion costs FG – conversion costs


P 900 P 1,400 P 86,000 P 88,200

Journal Entries: Various accounts 300,000


1. Raw and In Progress 406,000
Accounts payable 406,000 6. Finished goods 404,500
Raw and in process 404,500
2. Cost of goods sold 15,000 To backflush RM costs to finished goods
Supplies 15,000
7. Cost of goods sold 402,700
3. Payroll 160,000 Finished goods 402,700
Accrued payroll 160,000 To backflush RM cost to cost of goods sold

4. Cost of goods sold 70,000 8. Raw and in process 500


Marketing expense 50,000 Finished goods 2,200
Administrative expense 40,000 Cost of goods sold 2,700
Payroll 160,000 To adjust ending inventories for the conversion
costs
5. Cost of goods sold 300,000

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