Just in Time and Backflush

Costing
Learning Objectives
1.Understand the JIT philosophy
2.Know and understand the five key elements
involved in the operation of a JIT system
3.Differentiate the JIT system from the
traditional costing system
4. Understand backflush costing
Just in time Processing
JIT manufacturing is dedicated to producing the right products or parts at the right time
as they are needed. Under the JIT processing, raw materials are received just in time for
use in production, subassembly parts are completed just in time for use in finish goods,
and finish goods are completed just in time to be sold.
Primary Objective
The objective of JIT system is to eliminate all manufacturing inventories. Inventories are
considered to have an adverse effect on net income because they tie up funds and storage
space that could be made available for more productive purposes.
Important Elements of JIT
1. Dependable suppliers 2. improve product flow lines
2. Creating flexible manufacturing system 4. Multi-skilled work force
3. Total quality control system
Benefits of JIT: Mfg. inventories are reduced; product quality enhanced; rework costs
are reduced/eliminated; production cost savings are realized
Distinguishing characteristics of JIT:
Production costs are accumulated with inventory at later stages of the
production process. JIT assumes that the direct materials, work in process and
finished goods will be minimal. Labor and overhead are normally accumulated
directly in the Cost of Goods Sold account. At the end of the period, the labor
and overhead costs associated with any unsold or uncompleted items are
“backed out” and included in either finished goods or work in process
respectively. JIT is often referred to as backflush costing.
Major differences between the traditional costing and JIT:
1. Combines the materials and work in process-Raw and in process account
2. No separate account for direct labor – charged to conversion cost or CGS
3. Overhead is not applied to production until they are completed. When
products are completed under the JIT costing, labor and overhead is added
to cost of goods sold, since the goods are sold after production is completed.
Features of JIT
1. Raw materials are delivered at exactly the points they are needed and
just when they are needed to initiate production.
2. Eliminates the need for the warehouse.
3. Reduces cost of handling – eliminates expensive bulk-moving equipment.
4. Maintains relatively small inventory levels.
5. Minimize the time which elapses between the beginning of production to
the completion of production and ultimate sale of inventory to the
organization’s customers.
6. Wait for the receipt of customer orders before beginning production.
Comparison between TC and JIT:
Assume that TRAMS Co. manufactures cellular telephones and uses JIT production
system. The following transactions occurred during January.
A. Trams purchased P170,000 of raw materials.
B. All materials purchased were requisitioned for production.
C. Trams incurred direct labor costs of P80,000.
D. Actual factory overhead costs amounted to P122,000.
E. Trams applied conversion costs total P202,000 (including direct labor cost of P80,000)
F. All telephones were completed and sold.
Journal entries
Traditional Costing System (TCS) Just in Time (ITCS)
A. Materials – 170,000 A. Raw and In Process 170,000
Accounts Payable – 170,000 Accounts Payable 170,000
B. Work in Process - 170,000 C. Conversion Cost - 80,000
Materials - 170,000 Accrued Payroll 80,000
C. Work in Process - 80,000 D. Conversion Cost - 122,000
Accrued Payroll - 80,000 Miscellaneous Accounts - 122,000
D. FOHC - 122,000 F. Cost of Goods Sold 372,000
Misc. Accounts -122,000 Raw and In Process – 170,000
E. Work in Process - 122,000 Conversion Cost - 202,000
Factory overhead - 122,000
F. Finished Goods - 372,000
Work in Process - 372,000
Cost of Goods Sold – 372,000
Finished Goods - 372,000
 Problem 1:
The following balances are given for January 1 and January 31:
Jan. 1: Raw and in process (Materials, P8,750 and Conversion costs, P16,250 P 25,000
Finished goods (Materials, P60,000 and Conversion costs, P90,000 150,000
Jan. 31: Raw and in process (Materials, P10,500 and conversion costs, P19,500 30,000
Finished goods (Materials, P63,000 and Conversion costs, P117,000 180,000
The following transactions occurred during the month of January:
• Purchases of raw materials, P500,000
• Conversion costs applied to production (DL, P100,000 and FOH P225,000)
Required: Prepare all the necessary journal entries:
1. Raw and in process 500,000
A/P 500,000
2. COGS 325,000
Accrued payroll 100,000
FO Applied 225,000
Backflush entries:
1. To backflush the RM from RIP to FG (RM portion of COGM)
RM- RIP, beg. 8,750
RM purchases 500,000
RM-RIP, end (10,500)
RM-COGM 498,250
FG 498,250
RIP 498,250
2. To backflush the RM from FG to RIP (RM portion of COGS)
COGS 495,250
FG 495,250
RM-COGM 498,250
RM-FG, beg. 60,000
RM-FG, end ( 63,000)
RM-COGS 495,250
3. Conversion Costs in RIP, FG
CC applied (CC-TMC) 325,000
CC-RIP, beg. 16,250
CC-RIP, end (19,500)
CC-COGM 321,750
CC-FG, beg. 90,000
CC-FG, end (117,000)
CC-COGS (Adjusted) 294,750
325,000
Adjustment 30,250
RIP (19,500-16,250) 3,250
FG (117,000-90,000) 27,000
COGS 30,250
Adjusted COGS = 495,250 + 294,750 = 790,000
Problem 2:
The Clifton Manufacturing Company has a cycle time of 15 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:
 Beg. Balance of RIP account, includingP600 of conversion cost P5,500
 Beg. balance of Finished Goods account, including P2,000 of CC 6,000
 Raw materials received on credit 173,000
 Ending RIP inventory per physical count, including P850 CC estimate 6,200
 Ending FG inventory per physical count, including P1,550 CC estimate 4,900
Required: Prepare all the journal entries that involve the RIP account and/or the finished
goods account.
Solution
RIP 173,000
A/P 173,000
COGS
Accrued payroll
FOH-applied
(cannot be determined)
Backflush entries:
FG (173,000 +4,900 -5,350) 172,550
RIP 172,550
COGS (172,550+4,000-3,350) 173,200
FG 173,200
COGS 200
RIP (850-1,550) 200
FG (2,000-1,550) FM 400