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Just in Time &

Backflush Costing
Chapter 5
What is just in time (JIT)?

Raw Materials are received just in time


to go into production;
Manufactured parts are completed just
in time to be assembled into products;
And Products are completed just in
time to be shipped to customers.
What is just in time (JIT)?

With JIT, it eliminates the need


for the warehouse space that
has been considered an
expensive part of any
manufacturing operation.
It also reduces handling costs.
Type of production in JIT?

Normally, inventory production is


“ON DEMAND”.
Waiting for the receipt of customer
orders before beginning production.
Custom Furniture Manufacturers
Home builders
Aircraft
Characteristic of JIT costing
Production costs are accumulated with
inventory at later stages of production process.
Maintain small quantities of direct materials,
WIP, and FG.
Labor and overhead are normally accumulated
directly in cost of goods sold account.
At the end of the period, labor and overhead
associated with unsold/ incomplete items are
“backed out” from CGS and included in either
FG or WIP.
5 key elements of JIT system
Few suppliers willing to deliver in small lots

Creating individual flow line for each product

Reducing setup costs (automation)

Total Quality Control

Flexible work force


How to achieve JIT?
Careful scheduling of production
based on market projections to
reduce level of finished goods
inventory, and Raw Materials
inventory
Rearranging production facilities
to reduce processing time and
the amount of WIP inventory
Major differences between
Normal and JIT

Work in
Materials
Process

Raw and
In Process
Major differences between
Normal and JIT

Direct Factory
Labor Overhead

Conversion
Cost / CGS
Major differences between
Normal and JIT
• Overhead is applied to
products as they are being
Normal produced; recorded in WIP.

• Overhead is not applied until


product is completed; Labor
JIT and Overhead is added to
CGS.
Normal Costing
Just in Time Costing
Dr. Materials 70k
Cr. Accounts Payable 70k Dr. Raw and In process 70k

Cr. Accounts Payable 70k


Dr. WIP 70k
Cr. Materials 70k

Dr. Conversion Cost 80k


Dr. WIP 80k
Cr. Accrued Payroll 80k Cr. Accrued Payroll 80k

Dr. FOH 100k


Cr. Various Accounts 100k
VS Dr. Conversion Cost 100k

Cr. Various Accounts 100k


Dr. WIP 100k
Cr. FOH 100k
Dr. CGS 250k
Dr. FG 250k
Cr. Raw and in process 70k
Cr. WIP 250k
Cr. Conversion Cost 180k
Dr. CGS 250k
Cr. FG 250k
Backflush Costing
A shortened version of traditional
method of cost accounting.
Since in JIT, the time from the receipt
of the materials to the completion of
product is reduced to a few hours, the
usefulness of tracking the cost of
completion of the WIP becomes
impractical.
There is no detailed tracking of cost
of work in process.
Journal Entries in Backflush Costing

Dr. Finished Goods XXX


Cr. Raw and In process XXX

Record the cost of units completed


Journal Entries in Backflush Costing

Dr. Cost of Goods Sold XXX


Cr. Finished Goods XXX

Record the completed units sold


Journal Entries in Backflush Costing

Dr. Raw and In Process XXX


Dr. Finished Goods XXX
Cr. Cost of Goods Sold XXX
Adjustment of Cost of Goods Sold
Problem 1
RIP, beginning, including P6,900 conversion cost P42,600
FG, beginning, including P17,000 conversion cost P45,000
Raw Materials Purchased on credit P356,000
RIP, ending, including P4,500 conversion cost P22,500
FG, ending, including P5,000 of conversion cost P16,000
Direct Labor P150,000
Factory Overhead P180,000
Prepare all journal entries that involve the RIP account
and/or finished goods account.
Problem 2
RIP, beginning, including P2,400 conversion cost P23,400
FG, beginning, including P8,000 conversion cost P24,000
Raw Materials Purchased on credit P444,000
RIP, ending, including P3,600 conversion cost P25,600
FG, ending, including P7,000 of conversion cost P19,000
Direct Labor P210,000
Factory OverheadP189,000
Prepare all journal entries that involve the RIP account
and/or finished goods account.
Problem 3
Materials purchased on credit P146,000
RIP, beg., including P4,400 conversion costs P15,000
FG, beg., including P10,800 conversion costs P36,000
RIP, end., including P7,800 of conversion costs P24,000
FG, end., including P6,500 of conversion costs P18,000
Direct Labor P80,000
Factory Overhead P100,000

Compute for the amount of materials backflushed from RIP to


FG.
Compute for the amount of materials backflushed from FG to
CGS.
Prepare all journal entries.
Problem 4
Materials purchased on credit P230,000
RIP, beg., including P12,000 conversion costs P40,000
FG, beg., including P8,800 conversion costs P35,000
RIP, end., including P15,700 of conversion costs P28,500
FG, end., including P13,100 of conversion costs P19,800
Direct Labor P180,000
Factory Overhead P225,000

Compute for the amount of materials backflushed from RIP to


FG.
Compute for the amount of materials backflushed from FG to
CGS.
Prepare all journal entries.