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Just in Time

The document discusses just-in-time systems and backflush accounting. Just-in-time aims to produce goods exactly when needed, minimizing excess inventory. Backflush accounting records costs after completion/sale rather than tracking costs through production stages. The document explains the concepts and accounting entries for each.

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16 views18 pages

Just in Time

The document discusses just-in-time systems and backflush accounting. Just-in-time aims to produce goods exactly when needed, minimizing excess inventory. Backflush accounting records costs after completion/sale rather than tracking costs through production stages. The document explains the concepts and accounting entries for each.

Uploaded by

officialrrk06
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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JUST IN TIME

SYSTEM
JUST IN TIME SYSTEM

• Just in time is a production and inventory management system that aims at producing
goods exactly when they are needed by the customer, minimizing the need for excess
inventory (raw materials, WIP and finished goods) and reducing waste.
• Under just in time goods are produced when ordered by the customer and no inventory of
raw materials is held, and when goods are produced they are immediately shipped to the
customer.
• The concept is that there is a continuous flow through raw materials warehousing,
through the production process, into finished goods and straight out to the customer.
JUST IN TIME SYSTEM

• The inventory orders (for materials) and production schedules are based on customer
demand – goods are made in response to customer demand.
• Thus, no (or a very small amount) inventory of raw materials is held prior a customer
odder.
• The principle of a Just-in-time system is that production is pulled by customer demand
and this in turn pulls the purchasing procedures.
• Thus, theoretically there are zero stocks of raw materials.
JUST IN TIME SYSTEM

• Inventories of raw materials, work in progress and finished goods will be kept as low as
possible so holding costs will be kept to a minimum.
• However, the trade off is that very many small orders for raw materials will be made
every time the order is received and therefore material ordering costs will be very high.

CUSTOMER MANUFACTURIN FINISHED SHIPPED TO


ODDER G PRODUCT CUSTOMER
JUST IN TIME SYSTEM

• For JIT to operate efficiently the following must be met.


1. A reliable supplier
• The company has to have a reliable supplier, with whom they have a good working
relationship, who is preferably close by. This will allow the company to order materials
and know that the goods will arrive promptly.
• A just in time system can not work if the supplier of raw materials is not reliable. If the
supplier is not reliable there will be delays in production and delivery of customer orders.
JUST IN TIME SYSTEM

• For JIT to operate efficiently the following must be met.


2. A flexible workforce
• A JIT system often requires a flexible and multi-skilled workforce that can adapt to
changes in production demand.
• Depending on customer demand, the workforce may need to increase or decrease their
working hours, or be skilled enough and willing to work on different parts of the
production process.
• A flexible workforce should lead to increased labor productivity.
JUST IN TIME SYSTEM

• For JIT to operate efficiently the following must be met.


3. Continuous Flow
• JIT requires the production processes to be designed for a continuous flow, with minimal
interruptions or delays.
• The premises should be laid out in such a way that the time taken to transfer goods from
raw material inventory holding to the production process and into finished goods
inventory holding is minimized.
• This should result in reduced lead times.
JUST IN TIME SYSTEM

• For JIT to operate efficiently the following must be met.


3. Quality at the Source
• As so little inventory is held, there are no ‘spares’, therefore the raw material must be good
enough to take straight into the production process – if it is faulty then production will cease.
In order to obtain the higher quality input, higher purchase costs may arise.
• The quality of the work in progress must be consistently high. If partially completed units have
to be thrown away due to substandard workmanship, this will lead to delays in fulfilling
customer demands. Ensuring the quality of work in progress should result in reduced wastage
costs.
BACKFLUSH ACCOUNTING

• Backflush accounting sometimes called delayed costing or endpoint costing or post-deduct


costing is a method of costing, related to JIT production systems, that records the costs
associated with producing a good or service only after they are completed, or sold.
• JIT enables purchasing, production and sales to occur in quick succession with minimal
stocks.
• The absence of stocks makes choices about cost-flow assumptions (such as weighted-
average or first-in, first-out) or stock costing methods (such as absorption or variable
costing) unimportant – all manufacturing costs of a period flow directly into cost of goods
sold.
BACKFLUSH ACCOUNTING

• Under normal traditional costing methods the accounting system entries occur in the same order
as actual purchases and production.
• These traditional systems track costs sequentially as products pass from direct materials, to
work in progress, to finished goods and finally to sales.
• In backflush costing, the detailed tracking of costs associated with each unit produced is
replaced with standard costs per unit.
• Backflush costing system focuses first on the output of the organization and then works
backwards when allocating cost between costs of goods sold and inventories, with no separate
accounting for WIP.
BACKFLUSH ACCOUNTING

• Standard cost refers to predetermined or established costs that a company expects to


incur for producing a unit of product or providing a service under normal operating
conditions.
• These costs serve as benchmarks against which actual costs can be compared, allowing
for performance evaluation, variance analysis, and better management control.
• Standard costs are typically set based on careful analysis of historical data, industry
benchmarks, engineering estimates, and other relevant factors.
BACKFLUSH ACCOUNTING

• There are two common variants of backflush costing, the difference being on the trigger points.
• Trigger points in backflush costing are specific events or transactions that prompt the allocation of costs to
products.
• Variant 1: This has two trigger points
• The purchase of raw materials and components
• Sale of finished goods

• Variant 2: This has three trigger points


• Purchase of direct materials
• Completion of finished goods
• Sale of finished goods
BACKFLUSH ACCOUNTING

• Variant 1: Journal Entries

When Sales is made (Goods sent to a customer)


When
Dr Costconversion
direct materials
of goods soldcost incurred
are(actual
account Purchased
sales at standard
Dr Material-in-process
Conversion
cost) Cost account
account
(at (at
actual)
actual)
Cr: Material-in-process
Cr: payablea/c (Standard Cost)
Accounts payable/Cash/Bank
Cr: Conversion Cost control a/c (as allocated)
BACKFLUSH ACCOUNTING

• Variant 2: Journal Entries

When Goods are Finished


Dr Finished
When directgoods
conversion
Goods materials
are sold
control
cost incurred
areaccount
Purchased
Dr Cost
Material-in-process
Conversion
Cr: of
Raw
goods
material
costs
soldcontrol
account
in-process
account
account
(at
(ataccounts
standard)
actual)
(at actual)
(at
Cr: Accounts
Finished
standard)
goods
payablecontrol account
Cr: Conversion Costs (as allocated)
BACKFLUSH ACCOUNTING

• Adjustment for Over-absorption or Under-absorption


• Any under- or over-absorption of conversion costs is accounted for and adjusted with the
cost of goods sold account at the period end.

In case of Under-Absorption
Over-Absorption
Dr: Conversion costs allocated account
Dr: Cost of goods
Cr: Cost sold account
of goods sold account
Cr: Conversion cost control account
BACKFLUSH ACCOUNTING

• Illustration
• The manufacturing cost information for March for a division of XYZ plc is as follows :
• Cost incurred in the production period Tsh’000
• Purchase of raw materials 4,250
• Labor 2,800
• Overheads 1,640
BACKFLUSH ACCOUNTING

• Illustration
• Activity in March Units (‘000)
• Finished goods manufactured during the period 180
• Sales 145
• Standard cost per unit Tsh
• Materials 20
• Labor 15
• Overhead 9
BACKFLUSH ACCOUNTING

• Illustration
• There were no opening stocks of raw materials, WIP or finished goods. It should be
assumed that there is no direct materials variance for the period.
• Required: Pass Journal entries and Show necessary legers if
• A. The trigger points are purchase of raw materials and components and Sale of finished
goods
• B. The trigger points are Purchase of direct materials, Completion of finished goods, and
Sale of finished goods

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