ReSA

The Review School of Accountancy

R. Papa Cor. S. H. Loyola Sts. , Sampaloc, Manila
 Tel Nos. (02)82886922/09152303213/09086567516
New Era University
Advanced Financial Accounting & Reporting Cost Accounting – JIT-Backflushing;
ABC and FOH Service Cost Allocation
antonio jaramillo dayag
Cost Accounting – JIT Philosophy-Backflushing; ABC
Costing and FOH/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.)

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 Advanced Financial Accounting & Reporting
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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.

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). What was the amount of over-applied
or Under-applied conversion cost for the month?
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
5. Determine the amount of cost of goods sold after all adjustments were made.

II – 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:
1. Determine the amount to be backflushed from RIP to Finished Goods
2. Determine the amount to be backflushed from Finished Goods to Cost of Goods
Sold.
3. Determine the amount of Cost of Goods Sold after all transactions and
adjustments were completed.
III – 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
Scheduling and setup 273,000 780 setups
Materials handling 640,000 1,600,000 pounds of material

**In the presence of faith, hope, or love, miracles do happen.**

**The invariable mark of wisdom is to see the miraculous in the common.**

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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
b. ABC Costing
2. Determine the total product cost, using the:
a. Traditional/Conventional Costing
b. ABC Costing
3. Determine the unit product cost, using the:
a. Traditional Costing/Conventional Costing
b. ABC Costing
4. Determine the selling prices based on unit costs for:
a. Traditional Costing/Conventional Costing
b. ABC Costing

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.
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.
IV – 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.
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.
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.

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 Advanced Financial Accounting & Reporting
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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).
V – 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.
2. Compute the total cost of Batch No. 67.
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.

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
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 Advanced Financial Accounting & Reporting
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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

Problem III
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)
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)
**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.**
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**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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GOD BLESS as ALWAYS!!!
****God’s LOVE is like a river that keeps on flowing…****

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