ACC 122: Cost Accounting and Control

Student Activity Sheet Module # 19

Name: ____________________________________________________________ Class number: _______

Section: ____________ Schedule: _____________________________________ Date: _______________

Lesson title: Backflush Costing System (JIT system) Materials:

Lesson Objectives: Textbook, SAS, & calculator
At the end of this module, I should be able to References:
1. Explain the Backflush Costing System used in a Just-In-Time Hansen & Mowen; Cost Accounting &
Inventory System. Control; 2019 Edition
Brewer, Garisson & Noreen;
2. Familiarize with the journal entries in a Backflush Costing Introduction to Managerial Accounting;
System. 7th edition
Pedro P. Guerrero
Practical Accounting 2

Productivity Tip:
Schedule doing practice drills similar to the ones in this module two more times this week. Doing short drills
on different days will help you master the process!

A. LESSON PREVIEW/REVIEW

1) Activity 1 : Introduction/Review (5 mins)

Hello there! We are getting close to the end of this course, so don’t lose focus ☺ To start this
module, let us read the introduction of the JIT system and in comparison to the traditional systems for
you to understand more about this module. So if you are ready, you may start.

One of the main differences of JIT systems with traditional systems is the method of this system
about its accounting records. This concept helps to reduce the cost, it also helps to reduce the accounting
records. Journal records of traditional systems start from purchasing raw materials and inventories of raw
materials that requires keeping multiple inventory accounts such as inventory of raw materials, inventory
of work in process, and inventory of built goods along with keeping materials and direct labor accounts.
It should be noted that manufacturing companies that produce different products using traditional
systems, need to register thousands of documents in journals and ledger when buying and using
materials.

Thus making traditional accounting systems are very expensive in comparison with the JIT
system because the JIT system has reduced the number of records and used accounts, and
therefore reduces and simplifies accountant’ work. This record system is called backflush costing.
Backflush costing is appropriate for JIT environments because in this environment work in process and
manufactured goods is minimum. In the backflush costing system, there is no attempt to trace
raw materials and their components from depot to work during construction and finished goods. Backflush
costing system omits the events related to record of raw materials movement to work during
production, and in addition, movements of inventories to the completion of finished goods are not
reported (Swenson & Cassidy, 1993).

Page 1 of 13
This document is the property of PHINMA EDUCATION.
 ACC 122: Cost Accounting and Control
Student Activity Sheet Module # 19

Name: ____________________________________________________________ Class number: _______

Section: ____________ Schedule: _____________________________________ Date: _______________

2) Activity 2 (LO1& LO2): What I Know Chart, part 1 (5 mins)

Alright! Let’s see what you already know, answer the first column (What I know). Leave the third
column (What I Learned) blank at this time.
What I Know Questions What I Learned (Activity 5)

1. What is Just-In-Time Inventory

System?

2. The inventory account under

backflush costing combines
___________ and ____________.

3. What happens to underallocated

or overallocated conversion costs
in backflush costing?

B. MAIN LESSON
1) Activity 3: Content Notes (50 mins)

Make sure to highlight or underline the important parts!

LO1: Explain the Backflush Costing System used in a Just-In-Time Inventory System.

Just-In-Time (JIT) System is a management strategy that minimizes inventory, increases efficiency and
productivity through elimination of specific causes of rework, scrap, and wastes . Non-value-added activities
are a major source of waste, such activities are either unnecessary or necessary but inefficient and
improvable. JIT System is also a management approach that maintains that goods should be pulled through
the system by present demand rather than pushed through the system on a fixed schedule based on
anticipated demand. A Just-In-Case System is a push-system wherein the business keeps stocks of inventory
and finished goods as high as possible.

JUST-IN-TIME SYSTEM VS. JUST-IN-CASE SYSTEM

Characteristics

Page 2 of 13
This document is the property of PHINMA EDUCATION.
 ACC 122: Cost Accounting and Control
Student Activity Sheet Module # 19

Name: ____________________________________________________________ Class number: _______

Section: ____________ Schedule: _____________________________________ Date: _______________

● Production Precision ---------- Production Approximation

● Actual Demand------------------ Demand Forecast
● Small Lots ------------------------ Large Lots
● Small Inventories --------------- HIgh Inventories
● Less Waste ----------------------- More Wastes
● Better Communication --------- Poor Communication
●
Note: For additional reading about Just-In-Time and Just-In-Case Inventory System, please refer to
your book, Chapter 11 pg. 544-545 and pg. 551-560. And for more discussion, you may visit
this link https://bit.ly/What-Is-Just-In-Time.

Backflush Costing is a product costing system generally used in a just-in-time ( JIT ) inventory
environment. It is an accounting method that records the costs associated with producing a good or service
only after they are produced, completed, or sold.

It omits recording some or all of the journal entries relating to the cycle from purchase of direct materials
(stage 1) to production resulting in work-in-process (stage 2) to manufacture of finished goods(stage 3) and
to the sale of finished goods (stage 4). Actual conversion costs are recorded as incurred and applied to
products at various trigger points. Trigger points are stages in the cycle, from the purchase of direct materials
and incurring of conversion costs (stage 1) to the sale of finished goods (stage 4), at which journal entries are
made in the accounting system.
The output trigger point reaches back and pulls ("flushes") the standard direct material costs from
Materials and In-Process Inventory Control and the standard conversion costs for manufacturing the finished
goods that explains how backflush costing gets its name at the completion of good finished units.

LO2: Familiarize with the journal entries in a Backflush Costing System.

In backflush costing, there are three methods used and these are illustrated below. The three methods
differ in the number of trigger points at which journal entries are made in the accounting system.
Method 1 Method 2 Method 3

Trigger 1. Purchase of raw 1. Purchase of raw materials. -

Points materials. -
2. Completion of finished 1. Completion of finished
goods. 2. Sale of finished goods. goods.
3. Sale of finished goods. 2. Sale of finished goods.

Inventory 1. Raw and In Process (RIP) 1. Raw and In Process (RIP) 1. Finished Goods
Account Account Account Account.

Page 3 of 13
This document is the property of PHINMA EDUCATION.
 ACC 122: Cost Accounting and Control
Student Activity Sheet Module # 19

Name: ____________________________________________________________ Class number: _______

Section: ____________ Schedule: _____________________________________ Date: _______________

2. Finished Goods Account

Main 1. Three trigger points. 1. Two trigger points. 1. Two trigger points.
Features 2. Use of combined raw 2. Use of combined raw 2. Simplest of all.
materials and in process materials and in process
account. account.
3. No finished goods account.
No journal entries in the accounting system for work in process (stage 2) in all the three methods
illustrated above as these methods are usually used where the amounts of work in process are small.

The following data will be used to illustrate the three methods:

Materials purchased on credit for the period P 195,000

Conversion costs for the period 120,000
Number of units manufactured 10,000 units
Number of finished units sold 9,900 units

The cost per unit is P31 (P19 materials + P12 conversion costs). There are no opening stocks and for
simplicity it is assumed that there are no variance. Using the backflush costing the journal entries under the
three methods are:
Method 1: Three Trigger Points
Transactions Journal Entries

(a). Purchases of raw materials Raw and In Process (RIP) 195,000

Accounts Payable 195,000

(b). Incur conversion costs Conversion Costs 120,000

Various Accounts 120,000

(c). Completion of finished goods Finished Goods 310,000

(10,000 units x P31 = P310,000) Raw and In Process (RIP)* 190,000*
Conversion Cost 120,000

(d). Cost of goods sold Cost of Goods Sold 306,900

(9,900 units x P31 =P306,900) Finished Goods 306,900
*10,000 units manufactured x P19 cost of materials = 190,000.
Entry (c) gives backflush costing its name. Note, costs have not been recorded sequentially with the flow of
product along its production route through work in process and finished goods. Instead, the output trigger point reaches
back and pulls the direct materials costs from Raw and In Process account and the conversion costs for manufacturing
the finished goods.

Page 4 of 13
This document is the property of PHINMA EDUCATION.
 ACC 122: Cost Accounting and Control
Student Activity Sheet Module # 19

Name: ____________________________________________________________ Class number: _______

Section: ____________ Schedule: _____________________________________ Date: _______________

Method 2: Two Trigger Points

Transactions Journal Entries

(a). Purchases of raw materials Raw and In Process (RIP) 195,000

Accounts Payable 195,000

(b). Incur conversion costs Conversion Costs 120,000

Various Accounts 120,000

(c). Completion of finished goods No entry

(d). Cost of goods sold Cost of Goods Sold 306,900

Raw and In Process* 188,100
Conversion Costs** 118,800
The cost of finished units is computed only when finished goods are sold [which corresponds to entry (d)]: 9,900
units sold x P31 per unit =P306,900, which is comprised of direct materials costs (9,900 units sold x P19 material cost
per unit =P188,100) and conversion cost (9,900 units x P12 conversion cost per unit =P118,800). The under-allocated
conversion costs of P1,200 (120,000-118,800) is closed to the Cost of Goods Sold account.

Method 3: Two Trigger Points

Transactions Journal Entries

(a). Purchases of raw materials No entry

(b). Incur conversion costs Conversion Costs 120,000

Various Accounts 120,000

(c). Completion of finished goods Finished Goods 310,000

Accounts Payable 190,000
Conversion Cost 120,000

(d). Cost of goods sold Cost of Goods Sold 306,900

Finished Goods 306,900

The third method doesn’t record Accounts Payable for direct materials until the products being manufactured are
completed. This method of backflush costing is feasible only if there is a short log between receipt of direct materials and
completion of production.

Page 5 of 13
This document is the property of PHINMA EDUCATION.
 ACC 122: Cost Accounting and Control
Student Activity Sheet Module # 19

Name: ____________________________________________________________ Class number: _______

Section: ____________ Schedule: _____________________________________ Date: _______________

2) Activity 4: Skill-building Activities (60 mins) SCORE: ________________

Let’s try to practice what you have learned! Check your answers against the Key to Corrections
found at the end of this SAS. Write your score on the space provided.

Part I (LO1): Backflush Costing System (JIT system)

1. The objective of reducing inventory to zero is possible if all of the following conditions are present, except:
a. low or insignificant setup costs c. long setup times
b. minimum lead times d. balanced and level work loads

2. Advantages that result from reducing raw materials inventory include all of the following except:
a. a decreased possibility of not being able to produce a unit when required
b. a need for less storage space
c. a reduced risk of obsolescence
d. a reduced risk of damaged materials

3. All of the following are obstacles to JIT purchasing, except:

a. the layout of the production process
b. the frequency of schedule changes
c. the attitudes of purchasing agents and suppliers
d. all of the above are obstacles
4. All of the following are JIT performance measures, except:
a. capacity utilization c. inventory turnover
b. cycle time efficiency d. unscheduled maintenance downtime

5. In backflush costing, if the conversion cost in the Raw and In Process was $500 on July 1 and $1,000 on
July 31, the account to be credited at the end of July for the $500 increase would be:
a. Raw and In Process c. Raw Materials
b. Finished Goods d. Cost of Goods Sold

6. To backflush materials cost from Raw and In Process (RIP) to Finished Goods, the calculation would be:
a. Ending RIP Inventory + Materials Received during the period - Beginning RIP Inventory
b. Ending Finished Goods Inventory + Materials Cost Transferred from RIP - Beginning Finished
Goods Inventory
c. Beginning Finished Goods Inventory + Materials Cost Transferred from RIP - Ending Finished
Goods Inventory
d. Beginning RIP Inventory + Materials Received during the period - Ending RIP inventory

7. Cheetah Company has materials cost in the June 1 Raw and In Process of P10,000, materials received
during June of P205,000 and materials cost in the June 30 Raw and In Process of P12,500.

Requirement:
a. Compute the amount to be backflushed from Raw and In Process (RIP) to Finished Goods at the
end of June.

Page 6 of 13
This document is the property of PHINMA EDUCATION.
 ACC 122: Cost Accounting and Control
Student Activity Sheet Module # 19

Name: ____________________________________________________________ Class number: _______

Section: ____________ Schedule: _____________________________________ Date: _______________

ANS:
(a) Materials on June 1 Raw and In Process Account……………….. P_________
Materials Received in June…………………………………………..__________
Materials on June 30 Raw and In Process Account……………....__________
Amount Backflushed from RIP to Finished Goods Account……...P_________

PART II (LO2): Journal Entry

1. Backflush Costing with a Finished Goods Account. The LanFat Manufacturing Company uses a Raw
and In Process (RIP) inventory account and expenses all conversion costs to the Cost of Goods Sold
account. At the end of each month, all inventories are counted, their conversion cost components are
estimated, and inventory account balances are adjusted accordingly. Raw material cost is backflushed from
RIP to Finished Goods. The following information is for the month of August:

Beginning balance for RIP account, including P4,800 of conversion cost……...P 43,500
Raw materials received on credit……………………………………………………… 680,000
Ending RIP inventory per physical count, including P5,300 conversion
cost estimate……………………………………………………………………… 47,200
Requirement: Prepare all journal entries involving the RIP account.

ANS: Journal entries involving the RIP account are:

Account Explanation Debit Credit

To record all receipts of raw materials on credit for the

month of August.

To record the material cost to be backflushed from RIP

to Finished Goods.

Page 7 of 13
This document is the property of PHINMA EDUCATION.
 ACC 122: Cost Accounting and Control
Student Activity Sheet Module # 19

Name: ____________________________________________________________ Class number: _______

Section: ____________ Schedule: _____________________________________ Date: _______________

To offset the conversion cost (RIP account) to the

Cost of Goods Sold account.

2. Backflush Costing with No Finished Goods Account. The ATM Manufacturing Company produces only
for customer order, and most work is shipped within twenty-four hours of the receipt of an order. ATM uses
a Raw and In Process (RIP) inventory account and expenses all conversion costs to the Cost of Goods Sold
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 backflushed from RIP to Cost of
Goods Sold. The following information is for the month of June:

Beginning balance of RIP account, including P900 of conversion cost………. P 8,500

Raw materials received on credit…………………………………………………. 187,000
Ending RIP inventory per physical count, including P1,100 conversion
cost estimate……………………………………………………………………….. 7,900

Required: Prepare all journal entries involving the RIP account.

ANS: Journal entries involving the RIP account are:

Account Explanation Debit Credit

To record all receipts of raw materials on credit for the

month of June.

To record the material cost to be backflushed from RIP

to Cost of Goods Sold.

To offset the conversion cost (RIP account) to the

Cost of Goods Sold account.

Page 8 of 13
This document is the property of PHINMA EDUCATION.
 ACC 122: Cost Accounting and Control
Student Activity Sheet Module # 19

Name: ____________________________________________________________ Class number: _______

Section: ____________ Schedule: _____________________________________ Date: _______________

3. Backflush Costing; Entries in RIP and Finished Goods. The Clifton Manufacturing Company has a cycle
time of 1.5 days, uses a Raw and In Process (RIP) account, and charges all conversion costs to Cost of
Goods Sold. At the end of each month, all inventories are counted, their conversion cost components are
estimated, and inventory account balances are adjusted. Raw material cost is backflushed from RIP to
Finished Goods. The following information is for May:

Beginning balance of RIP account, including P600 of conversion cost………… P 5,500

Beginning balance of finished goods account, including P2,000 of
conversion cost……………………………………………………………………….. 6,000
Raw materials received on credit …………………………………………………… 173,000
Ending RIP inventory per physical count, including P850 conversion
cost estimate………………………………………………………………………….. 6,200
Ending finished goods inventory per physical count, including P1,550
conversion cost estimate…………………………………………………………….. 4,900

Required: Prepare all the journal entries that involve the RIP account and/or the finished goods account.
ANS: Journal entries involving the RIP account are:

Account Explanation Debit Credit

To record all receipts of raw materials on credit for the

month of June.

To record the material cost to be backflushed from RIP

to Finished Goods.

To record the material cost to be backflushed from

Finished Goods to Cost of Goods Sold.

Page 9 of 13
This document is the property of PHINMA EDUCATION.
 ACC 122: Cost Accounting and Control
Student Activity Sheet Module # 19

Name: ____________________________________________________________ Class number: _______

Section: ____________ Schedule: _____________________________________ Date: _______________

To offset the conversion cost (in RIP account and in

Finished Goods account) to the Cost of Goods Sold
account.

3) Activity 5: What I Know Chart, part 2 (5 mins)

It’s time to answer the questions in the “What I Know Chart” in Activity 2. Write your answers in
the “What I Learned” column. Let’s see your improvement!

4) Activity 6 (LO1 & LO2): Check for Understanding (70 mins)

To better test your knowledge on the topic, answer the given two problems to enhance your
learning. To check if you got it right, your teacher will provide you the key answers. Be honest in
checking your answers. ☺

Problem 1 (Multiple Choice)

1. In backflush costing, if the conversion cost in the Raw and In Process was P500 on July 1 and
P1,000 on July 31, the account to be credited at the end of July for the P500 increase would be:
a. Raw and In Process c. Raw Materials
b. Finished Goods d. Cost of Goods Sold.

2. One of the requirements for a JIT system to be successful is:

a. Cyclical production. c. Adequate inventory stock
b. Coupling it with job order d. High quality and balanced
costing work loads.

3. The continuing reduction of inventories is achieved by all of the following steps except:
a. Inventories are reduced until a problem is discovered
b. Once the problem is defined the inventory level is increased to keep the system
operating smoothly
c. Once the problem is removed, the inventory level is increased until another
a problem is discovered.
d. The problem is analyzed and practical ways are identified to reduce it

4. The costs to be offset against the savings from lower work in process levels in a JIT system
include all of the following, except:
a. handling a larger number of small batches of work in process
b. the higher probability of shutdowns due to the smaller safety stock
Page 10 of 13
This document is the property of PHINMA EDUCATION.
 ACC 122: Cost Accounting and Control
Student Activity Sheet Module # 19

Name: ____________________________________________________________ Class number: _______

Section: ____________ Schedule: _____________________________________ Date: _______________

c. the possibility that setup costs cannot be reduced enough to offset the larger number of
setups
d. the possibility of customer dissatisfaction due to slower response time to orders.

5. In backflush costing, if the conversion cost in Raw and In Process was P1,000 on March 1 and
P400 on March 31, the account to be credited for the P600 decrease would be:
a. Raw and In Process. c. Raw Materials
b. Finished Goods d. Cost of Goods Sold

Problem 2
1. Cersei Company has a cycle time of 3 days, uses a Raw and In Process (RIP) account, and
charges all conversion costs to Cost of Goods Sold. At the end of each month, all inventories are
counted, their conversion costs components are estimated, and inventory account balances are
adjusted. Raw material cost is backflushed from RIP to Finished Goods. The following information
is for June:

Beginning balance of RIP account, including P3,000 of

conversion costs……………………………………………………… P 29,250
Beginning balance of Finished Goods account, including
P10,000 of conversion costs………………………………………… 30,000
Raw materials received on credit……………………………………….. 562,500
Direct Labor cost, P375,000; Factory Overhead applied,
P450,000………………………………………………………………. 825,000
Ending RIP inventory per physical count, including P4,500
of conversion costs…………………………………………………… 32,000
Ending finished goods inventory per physical count,
including P8,750 of conversion costs……………………………… 26,250

What is the conversion cost of units sold in June? ______________

Problem 3 (Journal Entry)

The Futaba Manufacturing Company uses a Raw and In Process inventory account. The following data is
for the month of December:
Materials Received on credit ……………….. P 600,000
Conversion costs……………………………... 240,000
Number of units manufactured …………….. 20,000 units
Number of finished units sold……………….. 19,000 units
Cost per unit (P28 materials + P12
conversion costs).................................... P40/unit
There are no opening stocks and for simplicity it is assumed that there are no variance.

Requirement: Using the backflush costing, prepare the journal entries under the three methods:
a. Method 1: Three Trigger Points
b. Method 2: Two Trigger Points
Page 11 of 13
This document is the property of PHINMA EDUCATION.
 ACC 122: Cost Accounting and Control
Student Activity Sheet Module # 19

Name: ____________________________________________________________ Class number: _______

Section: ____________ Schedule: _____________________________________ Date: _______________

c. Method 3: Two Trigger Points

C. LESSON WRAP-UP

1) Activity 7: Thinking about Learning (10 mins)

1. Work Tracker
You are done with this session! Let’s track your progress. Shade the session number you just
completed.

2. Think about your Learning:

From a rating of 1-10, determine if you have learned all the learning objectives. What is the reason of
your rating?
__________________________________________________________________________________
__________________________________________________________________________________
What part of the module gave you a hard time to comprehend?
__________________________________________________________________________________
__________________________________________________________________________________

Any other questions or concerns you want to raise?

__________________________________________________________________________________
__________________________________________________________________________________

2) Assignment
To better enhance your knowledge about the topic, answer the following. Your teacher will
provide you the key answers after you are finished.

1. Refer to your book in Chapter 11 page 577

a. Answer the requirements in Exercise 11.15.

2. Michael Ross, general manager of a highly automated coffee production plant in Bulacan has provided
the following information for transactions that occurred during October. The production plant uses a JIT
costing system.
● Raw materials costing P300,000 were purchased.
● All materials costing P300,000 were requisitioned for production.
● Direct Labor costs of P200,000 were incurred.
● Actual factory overhead costs amounted to P995,000/
● Conversion costs allocated totaled P1,300,000. This includes the direct labor cost.
● All units are completed and immediately sold.

Page 12 of 13
This document is the property of PHINMA EDUCATION.
 ACC 122: Cost Accounting and Control
Student Activity Sheet Module # 19

Name: ____________________________________________________________ Class number: _______

Section: ____________ Schedule: _____________________________________ Date: _______________

Requirement:
(a) What is the overallocated or under-allocated conversion costs for the month?
______________.
(b) What is the balance of cost of goods sold account on October 31 assuming no
adjustment has been made for overallocated or under-allocated conversion costs?
______________.

FAQs

1. Does backflush costing comply with GAAP?

-No. Backflush costing does not comply with GAAP and cannot be used for external reporting
requirements. In this costing, work-in-process inventory, which is an asset, exists but is not recognized;
however, its breakdown from inventories is necessary to represent in Profit and Loss condition.

2. What are the implications of JIT and backflush costing systems for activity-based costing (ABC) systems?
-Simplifying the production process, as a JIT system does, makes more of the costs direct and reduces
the extent of overhead cost allocations

Page 13 of 13
This document is the property of PHINMA EDUCATION.