CHAPTER 6 JUST-IN-TIME AND BACKFLUSH ACCOUNTING

“The inventory arrives JUST IN TIME when the entity needs it.”

JUST-IN-TIME means that raw materials are received just in time to go into production, manufactured
parts are completed just in time to be assembled into products, and products are completed just in time
to be shipped to customers. This is used when an entity intentionally wants to maintain relatively small
inventory levels. This also allows the entity to decrease waste which reduces inventory cost. It requires
producers to forecast demand accurately.

System of Total
Few Suppliers Individual Flow Line Reduce Setup Time Flexible Work Force
Quality Control (TQC)

a company must improve its product reduce setup time TQC starts witht he develop a flexible
rely on few flow line by creating between prudction suppliers who workforce where
suppliers who are individual flow line runs through ins[ect the goods workers must be
willing to make for each seaparat employee training before they are must be multi-
frequent deliveries product and creating a shipped; entity's tasked
in small lots flevible employee are
manufacturing responsible for
system (FMS) inspecting partially
completed units
before moving to
next workstation

There are five key elements involved in the operation of JIT system:

Just-in-time (JIT) costing differs from traditional costing with regards the accounts used and the timing of
cost recording. Basically, there are three major differences which are:

1. Materials account and Work-in-Process account in traditional costing are combined in one
account called Raw and in Process account in JIT costing.
2. No separate account for direct labor is created. Therefore, direct labor and factory overhead are
charged to a Conversion Cost account or sometimes direct to Cost of Goods Sold (COGS)
account.
3. Overhead is not applied to production in JIT until they are completed. Under JIT costing, the
completion of products means that labor and overhead can be added or is added to COGS.

At the end of the period, labor and overhead costs associated with nay unsold or unfinished items are
backed out” and included in either finished goods or work-in-process respectively.

BACKFLUSHING is also known as backflush costing or backflush accounting. It is a shortened version of

the traditional method of accounting for cost. The purpose is to simplify and to reduce the number of
events that are measured and recorded in the accounting system. This method has no detailed tracking
of the cost of work in process and inventories are adjusted at the end of the period. It also eliminates
some of the accounting steps under traditional costing and some of the general ledger accounts are
combined into one. Under here, some or all elements of the cost of output are determined only after
the production is completed.

ILLUSTRATIVE PROBLEM 1

Senensen Manufacturing Company uses JIT costing for the production of goods during the month of
May. The following transactions summarize the major steps in Senenses’s production during the period.

a. Purchased raw materials amounting to P125,000 on account

b. All materials purchased were issued to production
c. Direct labor incurred amounted to P66,250
d. Actual factory overhead cost is P178,750
e. Applied conversion cost of Senensen totaled to P245,000 (including direct labor cost pf P66,250)
f. All goods were completed and sold.

Transactions recorded in traditional costing system would be:

a. Materials P125,000
Accounts Payable P125,000

b. Work in Process P125,000

Materials P125,000

c. Work in Process P66,250

Accrued Payroll P66,250

d. Factory Overhead P178,750

Miscellaneous Accounts P178,750

e. Work in Process P245,000

Factory Overhead P245,000

f. Finished Goods P370,000

Work in Process P370,000

Cost of Goods Sold P370,000

Finished Goods P370,000

The general ledger (T-account) will appear as follows:

Materials Factory Overhead Work in Process

a) 125,000 b) 125,000 d) 178,750 e) 178,750 b) 125,000 f) 125,000
c) 66,250
Accrued Payroll Finished Goods e) 178,750
Cost of Goods Sold
c) 66,250 f) 370,000 f) 370,000
Transactions recorded in JIT costing system would be:

A. Raw and in Process P125,000

Accounts Payable P125,000

C. Conversion Cost P66,250

Accrued Payroll P66,250

D. Conversion Cost P178,750

Miscellaneous Accounts P178,750

E. Finished Goods P370,000

Raw and in Process P125,000
Conversion Cost P245,000

The general ledger (T-account) will appear as follows:

Raw and in Process Conversion Cost

a) 125,000 f) 125,000 d) 245,000 f) 245,000

Cost of Goods Sold Wages Payable

f) 370,000 f) 66,250

ILLUSTRATIVE PROBLEM 2

Jing’s uses JIT costing for the production of delicacies during the month of July. The following
transactions are the major steps in the production:

1. Raw materials are received from suppliers amounted to P10,000 and paid in cash.
2. Direct labor costs amounted to P15,000 and overhead costs of P13,500 were incurred and
applied, respectively, during the month if July.
3. The ending inventory of work-in-process account is P9,000. This report is determined through
the production reports and is composed of the following:
Direct Materials P 4,700
Direct Labor 3,100
Overhead 1,200

Assume that the Finished Goods inventory at July 31 was P5,500, consisting of:

Direct Materials P 1,100

Direct Labor 2,000
Overhead 1,900
The journal entries under JIT costing are shown below:

1. Raw and in Process 10,000

Cash 10,000
To records product costs

2. Cost of Goods Sold 28,500

Wages Payable 15,000
Factory Overhead Control 13,500
To record product cost
3. Finished Goods 5,300
Raw and in Process 5,300
To record transfer of completed units
Materials received 10,000
Less: Mat. in RIP 4,700
Amount to be backflushed 5,300

4. Cost of Goods Sold

Finished Goods
To record transfer of units sold

Materials cost of completed units 5,300

Less: Mat. in FG, end 1,100
Amount to be backflushed 4,200

5. Raw and in Process 4,300

Finished Goods 3,900
Cost of Goods Sold 8,200
To adjust cost of goods sold

For Raw and in Process:

Labor cost – raw and in process 3,100
Overhead – raw and in process 1,200
Total to be adjusted 4,300
For Finished Goods:
Labor cost – finished goods 2,000
Overhead – finished goods 1,900
Total to be adjusted 3,900
ACTIVITY

Directions: Answer the following with correct answer.

1. Define Just-in-Time Costing System and Backflush accounting. (2pts)

2. Give at least three (3) elements of JIT costing system. (3pts)
3. Supply the requirement(s) in the problem below: (5pts)

The Papa-P Manufacturing Company produces only for customer order and most work is shipped
within forty-two hours of the receipt of an order. Papa-P uses a raw and in process (RIP) inventory
account
and expenses all conversion costs to the cost of goods sold account. Work is shipped immediately upon
completion, so there is no finished goods account. At the end of each month, inventory is counted, its
conversion cost component is estimated, and the RIP account balance is adjusted accordingly. Raw
material cost is back flushed from RIP to Cost of goods sold. The following information is for the month
of May.

Beginning balance of RIP account, including P3,100 of conversion cost P15,500

Raw materials received on credit 238,700
Ending RIP inventory per physical count,
including P4,100 conversion cost estimate 14,300

Required:
Compute the amount to be back flushed from RIP to Cost of Goods Sold
Answer key:

1. JUST-IN-TIME means that raw materials are received just in time to go into production,
manufactured parts are completed just in time to be assembled into products, and products are
completed just in time to be shipped to customers. This is used when an entity intentionally
wants to maintain relatively small inventory levels. This also allows the entity to decrease waste
which reduces inventory cost. It requires producers to forecast demand accurately.

BACKFLUSHING is also known as backflush costing or backflush accounting. It is a shortened

version of the traditional method of accounting for cost. The purpose is to simplify and to
reduce the number of events that are measured and recorded in the accounting system. This
method has no detailed tracking of the cost of work in process and inventories are adjusted at
the end of the period. It also eliminates some of the accounting steps under traditional costing
and some of the general ledger accounts are combined into one. Under here, some or all
elements of the cost of output are determined only after the production is completed.

2. Few Suppliers; Individual Flow Line; Reduce Setup Time; System of Total Quality Control (TQC);
Flexible Work Force

3. Solution:
Beginning balance of RIP account (P15,500-P3,100) P 12,400
Add: Raw materials received on credit 238,700
Total P 251,100
Less: Ending balance of RIP inventory per physical
Count (P14,300-4,100) 10,200
Amount to be back-flushed P 240,900