ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 43  May 2022 CPA Licensure Examination  Week No. 16

ADVANCED FINANCIAL ACCOUNTING & REPORTING A. DAYAG  C. CAIGA  M. NGINA

AFAR-18: BACKFLUSH COSTING, ACTIVITY-BASED COSTING &

SERVICE COST ALLOCATION
Backflush Accounting

Backflush costing also called as backflushing or backflush accounting is a shortcut approach

to accounting for the flow of manufacturing operations. It delays recording journal entries until
the goods have moved through the production process.

Backflush costing is usually used with matured Just-in-Time system, wherein traditional cost
accumulation procedures are impractical. Both job order and process costing system involves
the maintenance of work-in-process account which entails a lot of records, time and costs
especially in job order. It is in these particular aspects that JIT costing is preferable, wherein
backflush costing will be more suitable because the elapsed time between the receipt of raw
materials and the completion of product under the traditional cost accumulation procedures
(i.e., job and process) will lessen or reduced to few day or even by hours.

The Essence of Backflushing

The purpose of backflushing is to reduce the number of events (entries) that are measured
and recorded in the accounting system. Compared to both job order and process costing,
backflush costing is notable for its lack of detailed tracking of the work-in-process account. Its
keynote is simplicity because it eliminates some of the accounting stages in the traditional
costing which combines them with other steps. It also tends to combine general ledger accounts.
This method records purchases of raw materials and accumulates actual costs.

Differences Between Traditional Costing and Backflush Costing

JIT costing differs from traditional costing with regard to the accounts used and the timing of
cost recording. Specifically, three major differences exist.

1. First, instead of using separate accounts for Raw Materials and Work-in-Process, JIT costing
combines these into a Raw and In-Process Inventory (RIP) account. The rationale is that
the amount of work-in-process at any particular time will be low.

2. The second difference is that since direct labor is usually a minor cost item in a JIT setting,
no separate account for direct labor in JIT costing is created. In other cases, a Conversion
Cost account will be maintained to record actual direct labor and actual factory
overhead.

3. The third difference relates to the application of factory overhead in a traditional

manufacturing environment, overhead is applied to products as they are being produced.
As such, overhead is not applied to products until they are completed. No work-in-process
account exists to accumulate conversion costs. When products are completed under the
JIT costing, conversion cost is applied to the Cost of Goods Sold (or in some cases, Finished
Goods account.)

I – Recording Transactions and Account Balances under

JIT Costing / Backflush Costing
Bee Hon, general manager of Hormel Corporation’s Food Division, has provided the
following information for transactions that occurred during March. This division uses
a JIT costing system.
a. Raw materials were purchased at the cost of P97,000.
b. All materials purchased were requisitioned for production.
c. Direct labor costs of P77,000 were incurred.
d. Actual overhead costs amounted to P225,000.
e. Applied conversion costs totaled P300,000. This included P77,000 of direct labor.
f. All units were completed.

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-18
Week 16: BACKFLUSH COSTING, ABC & SERVICE COST ALLOCATION

Required:
1. Journal entries to record under:
A. Traditional Costing
B. Backflush/JIT Costing
2. Determine the March 31 balance in the Conversion Cost account (indicate whether
overapplied or underapplied).
3. Determine the March 31 balance in the Finished Goods account.
4. The amount backflushed from:
A. RIP to Finished Goods
B. Conversion Cost to Finished Goods
II – Account Balances
Conrad’s Jewelry Factory manufactures a variety of costume jewelry. The owner Rita
Conrad had recently decided to implement a JIT costing system. Transactions during
September were as follows:
a. Raw materials totaling P45,000 were purchased.
b. All materials purchased were requisitioned for production.
c. Direct labor costs of P11,000 were incurred.
d. Indirect labor costs amounted to P120,000.
e. Utilities costs totaled 15,000.
f. Other actual factory overhead costs amounted to P85,000.
g. Applied conversion costs totaled P221,000. This includes the direct labor cost.
h. All units were completed. (Assume: ALL UNITS COMPLETED ARE SOLD)

Required:
266,000 1. Determine the September 30 balance in the cost of Goods Sold account. No
adjustment has been made for Overapplied or Underapplied conversion cost.
10k under 2. What was the amount of overappplied or Underapplied conversion cost for the
month?
276,000 3. Determine the amount of cost of goods sold after all adjustments were made.

III – RIP and Finished Goods Account includes Conversion Cost (no separate
account maintained)
The Compaq Manufacturing Company has a cycle 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 June:

Beginning balance of RIP account, including P1,200 of

conversion cost ………………………………………………………………………………………… P 11,700
Beginning balance of finished goods account, including
P4,000 of conversion cost …………………………………………………………………. 12,000
Raw materials received on credit ………………………………………………………………… 222,000
Ending RIP inventory per physical count, including P1,800
conversion cost estimate………………………………………………………………………………. 12,800
Ending finished goods inventory per physical count,
including P3,500 conversion cost estimate …………………………………. 9,500

Required:
221,500 1. Determine the amount to be backflushed from RIP to Finished Goods
223,500 2. Determine the amount to be backflushed from Finished Goods to Cost of Goods Sold.
223,400 3. Determine the amount of Cost of Goods Sold after all transactions and adjustments
were completed.
IV – ABC Costing: Determining Product Cost and Selling Price
Belton Furniture Corporation had identified activity centers to which overhead costs
are assigned. The cost pool amounts for these centers and their selected activity
drivers for 2021 are as follows:

Activity Centers Costs Activity Drivers

Utilities P 300,000 60,000 machine hours 5/MH
Scheduling and setup 273,000 780 setups 350/setup
Materials handling 640,000 1,600,000 pounds of material 0.4/pound

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-18
Week 16: BACKFLUSH COSTING, ABC & SERVICE COST ALLOCATION

The company’s products and other and other operating statistics follow:
P R O D U C T S
A B C
Direct costs (direct materials and labor) P 80,000 P 80,000 P 90,000
Machine hours 30,000 10,000 20,000
Number of setups 130 380 270
Pounds of material 500,000 300,000 800,000
Number of units produced 40,000 20,000 60,000
Direct labor hours 32,000 18,000 50,000
Before it installed an ABC system, the company used a conventional costing system and
allocated factory overhead to products using direct labor hours.
The firm operates in a competitive market and product prices were set at a cost plus
a 20 percent markup.
Required:
1. Determine the total overhead allocated to each product, using the:
a. Traditional/Conventional Costing A-388,160; B-218,340; C-606,500
b. ABC Costing A-395,500; B-303,000; C-514,500
2. Determine the total product cost, using the:
a. Traditional/Conventional Costing A-468,160; B-298,340; C-696,500
b. ABC Costing A-475,500; B-383,000; C-604,500
3. Determine the unit product cost, using the:
a. Traditional Costing/Conventional Costing A-11.704; B-14.92; C-11.61
b. ABC Costing A-11.89; B-19.15; C-10.075
4. Determine the selling prices based on unit costs for:
a. Traditional Costing/Conventional Costing A-14.04; B-17.90; C-13.93
b. ABC Costing A-14.27; B-22.98; C-12.09
V – Comparison of Product Costs: Traditional vs. ABC Costing
Katherine Company of Cebu Company manufactures two types of field hockey sticks –
Regular and SuperPro. The following data have been obtained:
Regular SuperPro
Direct materials cost per unit P 33.00 P 38.00
Direct labor cost per unit 32.00 44.00
Direct labor hours 12,000 3,000
Machine hours 2,000 4,000
Engineering hours 450 450
Number of setups 5 20
Number of units 8,000 2,200
Overhead costs are assigned to products on the basis of direct labor hours. The overhead
costs consist of the following items:
Overhead Cost Item Amount
Setup costs P 250,000 10,000/setup
Engineering costs 180,000 200/EH
Machine costs 900,000 150/MH
Total costs P1,330,000
Required:
1. Using direct labor hours (conventional costing) to allocate overhead costs,
determine the cost per unit for each product. Reg-198; Super-202.9
R-120; S-486.55
2. Using activity-based costing, determine the cost per unit for each product.
3. Assuming the selling price of Regular and SuperPro amounted to P300 and P500,
respectively, determine the gross margin per unit for each product. R-180; S-13.45
Service Department Cost Allocation
- the allocation procedure for service department costs is a process of pooling,
allocating, repooling and reallocating costs.
- three basic methods are used to allocate the pooled service department cost to
the revenue producing departments.
a. Direct Method – allocates service department costs directly to the revenue-
producing areas without recognition of services provided among the service
departments
b. Step (Step-down or sequential) Method – allocates service department costs to
other service departments after considering the interrelationships among the
service departments and revenue-producing departments. A “BENEFITS-PROVIDED”
ranking is a listing of service departments in an order that begins with the
one providing the most to all other corporate areas and ends with the service
department providing service primarily to the revenue-producing areas.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-18
Week 16: BACKFLUSH COSTING, ABC & SERVICE COST ALLOCATION

c. Reciprocal (Algebraic or simultaneous solution or cross allocation or matrix

allocation or double distribution) Method – it allows refection of all
reciprocal services among service departments.
VI – Service Cost to Operating Departments
Following are data about Sharron Company’s two service departments and two operating
departments:
Service Operating
Departments Departments
A B X Y
Direct Costs P 400 P 600 P2,000 P3,000
Services performed by Dept. A 30% 30% 40%
Services performed by Dept. B 20% 70% 10%
Required:
1. Sharron allocates costs of its service departments using the direct method of
allocation. Find the total costs that will be allocated to each of the operating
departments. X-696; Y-304
2. Sharron allocates the cost of its service departments using the step-down method,
beginning with Department A. Find the total amount of cost that will be allocated
to each of the operating departments. X-750; Y-250
3. Sharron allocated costs of its service departments using the reciprocal method of
allocation. Find the total cost that will be allocated to each of the operating
departments. X-702; Y-298
VII - Factory Overhead Allocation / Service Department Cost Allocation
Gold Corporation has three production departments A, B, and C. Gold Corporation also
has two service departments, Administration and Personnel. Administration costs are
allocated based on value of assets employed, and Personnel costs are allocated based
on number of employees. Assume that Administration provides more service to the other
departments than does the Personnel Department (they are presented in a benefits-
provided ranking):
Allocation Bases
Departments Direct Costs Employees Asset Value
Admin. P900,000 25 P450,000
Personnel 350,000 10 600,000
A 700,000 15 300,000
B 200,000 5 150,000
C 250,000 10 800,000
Required:
1. Refer to Goldberg Corporation. Using the direct method, what amount of Administration
costs is allocated to A (round to the nearest peso)?
a. P216,000 c. P150,000
b. P288,000 d. P 54,000
2. Using the direct method, what amount of Personnel costs is allocated to B (round to
the nearest peso)?
a. P50,000 c. P43,750
b. P26,933 d. P58,333
3. Using the step method, what amount of Administration costs is allocated to Personnel
(round to the nearest peso)?
a. P 72,973 c. P 145,946
b. P291,892 d. P 389,189
4. Using the step method, what amount of Administration costs is allocated to A (round
to the nearest peso)?
a. P72,973 c. P145,946
b. P291,892 d. P389,189
5. Assume that Administration costs have been allocated and the balance in Personnel
is P860,000. What amount is allocated to A (round to the nearest peso)?
a. P213,964 c. P430,000
b. P106,982 d. P0
6. Assume that Administration costs have been allocated and the balance in Personnel
is P860,000. What amount is allocated to B (round to the nearest peso)?
a. P213,964 c. P106,982
b. P430,000 d. P143,333
7. Assume that Administration costs have been allocated and the balance in Personnel
is P860,000. What amount is allocated to C (round to the nearest peso)?
a. P213,964 c. P286,667
b. P430,000 d. P143,333
8. Assume the use of algebraic method to allocate the support or service department
costs, what amount is allocated to A(round to the nearest peso)? 406,757

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-18
Week 16: BACKFLUSH COSTING, ABC & SERVICE COST ALLOCATION

9. Assume the use of algebraic method to allocate the support or service department
costs, determine the total costs of the revenue-producing (operating) department
B(round to the nearest peso)? 369,158

Hybrid Costing / Blended Method – Operation Costing

Operation costing is a hybrid system because it contains features that are present in
both a job-costing system and a process-costing system. Direct materials are assigned
directly to the batches of goods produced (job order costing); in contrast, conversion
costs are accumulated by department (process costing)and are then assigned to
manufactured goods by using an averaging technique.
Operation costing is used by firms that produce different models of similar products.
The products go through essentially the same manufacturing process, so conversion costs
can be assigned in a manner similar to that used in process-costing systems. Materials,
on the other hand, are unique to the individual goods being produced and, accordingly,
the cost is assigned by batch (or in a manner similar to that used in job costing).
VIII – Hybrid - Operation Costing
Orville Knitters manufactures sweaters and uses an operation-costing system. All
sweaters are processed through Department No. 1, with subsequent processing taking
place in Department No. 2 or Department No. 3 depending on the type of fabric used.
Twenty thousand sweaters were produced during the year; there was no beginning or
ending work in process. Sixty percent of the goods were sent to Department No. 2 for
manufacturing.
Conversion cost incurred in the three departments totaled P504,000, subdivided as
follows: Department No. 1, P360,000; Department No. 2, P60,000; and Department No. 3,
P84,000.
Data pertaining to two representative orders, Nos. 545 and 567, were:
No. 545 No. 567
Direct materials P112,000 P 94,000
Number of sweaters 800 1,300
Subsequent processing department No. 3 No. 2
Required: Determine the cost of order Nos. 545 and 567. 545#-134,800; 567#-123,900
IX – Hybrid – Operation Costing
Levitt Corporation, which uses an operation-costing system, has three processing
departments. All units pass through Department No. 1; upon completion, 70% of the
goods are sent to Department No. 2 and 30% are sent to Department No. 3. Additional
data follow;
• Forty thousand units were manufactured during the year.
• Conversion cost in each department was: No. 1, P380,000; no. 2, P196,000;
and no. 3, P150,000.
• Batch No. 67, which consisted of 500 units, was sent to Department No. 3 for
its additional processing. Direct materials of P23,500 and P11,900 were
introduced to this batch in Department Nos. 1 and 3, respectively.
Levitt assigns conversion cost to goods manufactured on the basis of units produced.
Required:
1. Determine the conversion cost per unit in Department No. 1, Department No. 2,
and Department No. 3. 9.5; 7; 12.5
2. Compute the total cost of Batch No. 67. 46,400
Answers:
1.
Department No. 1: P380,000 ÷ 40,000 units = P 9.50
Department No. 2: P196,000 ÷ 28,000 units
(40,000 x 70%) = P 7.00
Department No. 3: P150,000 ÷ 12,000 units
(40,000 x 30%) = P12.50
2.
Direct materials (P23,500 + P11,900) P35,400
Department no. 1 conversion (500 x P9.50) 4,750
Department no. 3 conversion (500 x P12.50) 6,250
Total cost P46,400

Be great in act as you have been in thought.

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-18
Week 16: BACKFLUSH COSTING, ABC & SERVICE COST ALLOCATION

Problem I:
1. Journal Entries
Traditional Costing (Job or Process) Backflush Costing – Just-in-Time
a. Materials (or Stores Control)………97,000 a. Raw-and-In-Process……………… 97,000
Accounts payable…………………. 97,000 Accounts payable…………….. 97,000
b. Work-in-Process – DM……………….97,000 b. No entry
Materials (or Stores Control)…. 97,000
c. Payroll…………………………………….77,000 c. No entry
Accrued payroll……………………. 77,000
Work-in-Process – DL………………. 77,000 No entry
Payroll……………………………….. 77,000

d. Factory Overhead Control………..225,000 d. Conver. Cost – Actual (77+225)..302,000

Cash, AP, Various Credits…….. 225,000 Accrued payroll…………………. 77,000
Cash, AP, Various Credits……. 225,000
e. Work-in-Process-Applied FOH…..223,000 e. No entry
Applied FOH (300 – 77)………. 223,000
f. Finished goods (97+77+223)…..397,000 f. Finished goods………………………397,000
Work-in-Process…………………. 397,000 Conversion Cost-Applied….. 300,000
Raw-and-In-Process………… 97,000
T-Accounts:
Materials Work-in-Process Raw and In Process Finished Goods

Payroll

Conversion Cost
FOHC Finished Goods
Actual Applied

Applied FOH

2. Underapplied Conversion cost of P2,000 (or P2,000 debit balance)

3. P397,000
4. A. P 97,000
B. P300,000
Problem II – Account Balances
1.

2.

3.

Problem IV
Traditional Costing/Conventional Costing
Product A Product B Product C
Direct Cost (Direct materials +
Direct labor)
Overhead Allocated:
P1,213,000/100,000 DLH =
P12.13/DLH
A: P12.13/DLH x
B: P12.13/DLH x
C: P12.13/DLH x
Total Overhead Allocated (1)
Total Cost (2)
Divided by: Units Produced
Unit Cost (3)
Multiplied by: Cost plus Markup
Selling Price (4)

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 ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AFAR-18
Week 16: BACKFLUSH COSTING, ABC & SERVICE COST ALLOCATION

ABC Costing
Product A Product B Product C
Direct Cost (Direct materials + Direct labor)
Overhead Allocated:
Utilities: P300,000 / 60,000 = P 5
A: P 5 x _________
B: P 5 x _________
C: P 5 x _________
Sched. and Setup: P272,000/780= P350
A: P 350 x ________
B: P 350 x ________
C: P 350 x ________
Materials Handling: P640,000/1,600,000
= P .40
A: P.40 x _________
B: P.40 x _________
C: P.40 x _________
Total Overhead Allocated (1)
Total Cost (2)
Divided by: Units Produced
Unit Cost (3)
Multiplied by: Cost plus Markup
Selling Price (4)

Problem V:
1. Conventional/Traditional Costing using Direct Labor hours as the basis.
Regular Superpro
Direct materials cost per unit 33 38
Direct labor cost per unit 32 44
Overhead Allocated: P1,330,000 / (12,000 DLH + 3,000 DLH)
Regular: (P88.67 x 12,000)/8,000 units 133
Superpro: (P88.67 x 3,000)/2,200 units ___ 121
Unit Cost (1) 198 203

2. ABC Costing
Regular Superpro
Direct materials cost per unit 33 38
Direct labor cost per unit 32 44
Overhead Allocated:
Setup Cost: P250,000/25 setups = P10,000
Regular: (P10,000 x 5)/8,000 units
Superpro: (P10,000 x 20)/2,200 units
Engineering Cost: P180,000/ = P
Regular:
Superpro:
Materials Handling: P / = P
Regular:
Superpro:
Unit Cost (2)
3. Gross Margin/Profit per unit: Traditional/Conventional
Regular Superpro
Selling price per unit.…………………………………………………… P P
Less: Unit cost………………………………………………………………………… ______ ______
Gross margin/profit per unit……………………………………… P P_____
ABC Costing
Regular Superpro
Selling price per unit.…………………………………………………… P P
Less: Unit cost………………………………………………………………………… ______ ______
Gross margin/profit per unit……………………………………… P P_____

************
**In the presence of faith, hope, or love, miracles do happen.**
**The invariable mark of wisdom is to see the miraculous in the common.**
**It is not who is right, but what is right, that is important.**
**Your future depends on many things, but mostly on you.**
**No one finds life worth living – he has to make it worth living.**
**All of the significant battles are waged within ourselves.**
**You never find yourself until you face the truth.**
**Courage isn’t having the strength to go on, it’s going on when you don’t have the strength.**
**We rarely think about the other fellow, until we become the other fellow.**
**Courage is not a lack of fear but standing one’s ground inspite of fear.**
**When all else is lost, the future still remains.**
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