JUST-IN-TIME

SYSTEM AND
BACKFLUSH
COSTING
PATRICK LOUIE E. REYES,
CTT, MICB, RCA, CPA
JUST-IN-TIME SYSTEM
An inventory system that purchases parts for production
only when needed.

Some companies that use JIT:

•Toyota
•Dell
•Hewlett-Packard
•Harley-Davidson
JUST-IN-TIME SYSTEM
A Just-in-time system starts production
only when there is a demand for it. This is
called a “demand-pull”system.

Toyota uses Kanban, which is a Japanese

manufacturing system in which the supply
of components is regulated through the
use of an instruction card (Kanban) sent
along the production line.
JUST-IN-TIME SYSTEM
The cards contain the customer’s specification. Production
only starts when the production department receives the
Kanban.
If there is no Kanban,
production will not
begin.

Workers assemble the

parts according to the
customer’s
specifications.
JUST-IN-TIME SYSTEM
The JIT system requires a steady supply of raw materials or parts
from the supplier. Therefore, in the JIT system, it is a requirement
that the supplier is close to the factory. So that, as the raw
materials/parts are needed, the supplier is able to bring them to
the production area. Otherwise, the entire operations will not
proceed.

The JIT system also does not require much storage because raw
materials are only procured when needed, and finished products
are delivered directly to dealers as soon as it is finished.
ADVANTAGES OF A JIT SYSTEM
• Minimize storage and its related costs
• More efficient production
• Eliminates non-value adding activities and its related costs
• Products meet customer demands
• Workers are forced to avoid errors, otherwise entire
operations will stop
• Damage/Imperfections can be spotted and reworked
immediately
DISADVANTAGES OF A JIT SYSTEM
• If one phase of the production process stops, the entire
operation stops.
• Supplier has to be close to the production area, and they
need to be constantly supplying raw materials/parts to the
production area.
• High dependence on supplier, such that if the supplier
suffers from a problem (e.g. shortage), the entire process
will stop even if it only affects one phase.
• No room for error
JUST-IN-TIME SYSTEM
To help you understand JIT system, as applied to the
Toyota production process, visit:

https://www.youtube.com/watch?v=cAUXHJBB5CM
SEQUENTIAL TRACKING
a costing system in which recording of the journal entries
occurs in the same order as actual purchases and progress
in production. Costs are tracked sequentially as products
pass through each of the following four stages:

Each stage correspond to a “trigger point”. Trigger points trigger journalizing. ☺

BACKFLUSH COSTING
• An alternative to Sequential Tracking
• A costing system that omits recording some of the journal
entries relating to the stages from purchase of direct materials
to the sale of finished goods
• When journal entries for one or more stages are omitted, the
journal entries for a subsequent stage use normal or standard
costs to work backward to “flush out” the costs in the cycle for
which journal entries were not made
• In a JIT system, where inventories are minimal, Backflush
simplifies costing systems without losing much information.
ILLUSTRATION
Tap The (Key)Board™ is a company that produces
keyboards for PCs. The following information were
gathered:
• There are no beginning inventories of direct materials and
no beginning or ending work-in-process inventories.
• TT(K)B has only one direct manufacturing cost category
(direct materials) and one indirect manufacturing cost
category (conversion costs). All manufacturing labor
costs are included in conversion costs.
ILLUSTRATION
• From its bill of materials and an operations list
(description of operations to be undergone), TT(K)B
determines that the standard direct material cost per
keyboard unit is Php 19 and the standard conversion cost
is Php 12.
• TT(K)B purchases Php 1,950,000 of direct materials. To
focus on the basic concepts, we assume TT(K)B has no
direct materials variances. Actual conversion costs equal
Php 1,260,000. TT(K)B produces 100,000 good
keyboard units and sells 99,000 units.
ILLUSTRATION
•Any under-allocated or over-allocated conversion
costs are written off to cost of goods sold at the end of
April (today! 😂)

Let us use three examples to illustrate backflush

costing. These examples differ in the number and
placement of trigger points.
ILLUSTRATION
Example #1: The three trigger points for journal entries
are Purchase of direct materials and incurring of
conversion costs (Stage A), Completion of good
finished units of product (Stage C), and Sale of finished
goods (Stage D).

Note that there is no journal entry for Production

resulting in work in process (Stage B) because JIT
production has minimal work in process.
ILLUSTRATION
Normally, there would be three types of inventories (as
you have learned in the prelims 😁), but since stage B
is not a trigger point in this example, WIPI is not
considered as a type of inventory. This results to loss of
information (how much WIPI there is), but not much
loss, since JIT has minimal work in process anyway.
There would only be two inventory accounts:
•Raw and In-process (RIP) inventory
•Finished Goods inventory (FGI)
 ILLUSTRATION
Journal Entries:
Trigger Point A Trigger Point B
Purchase
of Direct
Materials
NO ENTRY
The elimination of the typical Work-in-Process account reduces the amount
Conversion of detail in the accounting system. Units on the production line may still be
Costs tracked in physical terms, but there is “no assignment of costs” to specific
Incurred work orders while they are in the production cycle. In fact, there are no work
orders or labor-time records in the accounting system.

Trigger Point C Trigger Point D

Record Record
Cost of Cost of
Good Units Good Units
Completed Sold
Record
The entries to record completion of good finished units of product (Stage C) gives backflush under-
allocated
costing its name. Costs have not been recorded sequentially with the flow of product along conversion
its production route through work in process and finished goods. Instead, the output trigger costs
point reaches back and pulls (“flushes”) the standard direct material costs from Raw and In-
Process Inventory and the standard conversion costs for manufacturing the finished goods.
ILLUSTRATION
Example #2: The two trigger points are Purchase of
direct materials and incurring of conversion costs
(Stage A) and Sale of finished goods (Stage D).

Note that in this example, there is no journal entry for

Production resulting in work in progress (Stage B) and
Completion of good finished units of product (Stage C)
because there are minimal work in process and finished
goods inventories.
ILLUSTRATION
In this example, we will only use one inventory account.
JIT systems can have minimal work in process, and units
that are produced are sent immediately to dealers (as
mentioned in Slide # 5).
ILLUSTRATION
Journal Entries:
Trigger Point A Trigger Point B
Purchase
of Direct
Materials
NO ENTRY

Conversion
Costs
Incurred

Trigger Point C Trigger Point D

NO ENTRY Record
Cost of
Good Units
Sold
Record
under-
allocated
conversion
costs
Note for Trigger Point D: RIP is credited for 1,881,000 because cost of materials used is not assigned
to produced but unsold units (19 x 1,000). The same is true for Conversion costs (12 x 1,000) .
ILLUSTRATION
Example #3: The two trigger points are Completion of
good finished units of product (Stage C) and Sale of
finished goods (Stage D).

Note that in this example, there are no journal entries

for Purchase of direct materials and incurring of
conversion costs (Stage A) and Production resulting in
work in process (Stage B) because there are minimal
direct materials and work-in-process inventories.
ILLUSTRATION
Journal Entries:
Trigger Point A Trigger Point B
NO ENTRY for Raw Materials purchased, because the acquisition of
direct materials is not a trigger point in this form of backflush costing.
NO ENTRY

Conversion
Costs
Incurred

Trigger Point C Trigger Point D

Record Record
Cost of Cost of
Good Units Good Units
Completed Sold
Record
under-
allocated
conversion
costs