JUST IN TIME AND BACKFLUSH COSTING

Back flush costing-is a simplified cost accumulation method of accounting the cost to produce goods or
services which are often used by companies that have adopted just in time (JIT) production system.

JIT system was first used by Ford Motor Company during 1920s, but it was subsequently adopted and
publicized by Toyota Motor Corporation of Japan as part of its system. In 1954, Toyota Motor
Corporation successfully implemented this system in order to minimize overstocking in car production.

The Back flush Costing method accounts the company’s inventories backward by calculating the cost of
products after they are sold, finished or shipped to customers rather than accounting it before and
during the production process. With this approach it delays the costing process until the production of
goods or services is completed. Standard costs are used to assign costs to units to record the
transactions and then flush costs backward to determine the remaining inventory. The result is that the
detailed tracking of costs is eliminated. The difference between the actual cost and standard cost will be
accounted as variance which will be charged to cost of goods sold account.

Traditional costing system records the costs of inventories from raw materials, purchases, work in
process, to finished goods and when it is sold. Back flush costing avoids following the usual movement of
inventories through the manufacturing process. It is best suited to a company that have adopted just in
time philosophy and it is used where the overall cycle time is relatively short and the inventory levels are
low.

Back flush costing has only two categories of costs, the materials and conversion costs. Its unique
feature is that there is no work in process account. The company uses trigger points to account for its
inventories. Trigger point refers to a stage in cycle going from the purchase of raw materials to the sale
of finished goods at which journal entries are made in the accounting cycle.

There are different methods of applying back flush costing. These methods differ in the number and
placement of trigger points at which journal entries are made in the accounting system.

Method No. of Journal Entries (Trigger Points) Location in cycle where the JE Made

1 3 Purchase of materials, Completion of finished goods

Sale of finished goods

2 2 Purchase of raw materials, Sale of merchandise

3. 2 Completion of finished goods, sale of finished goods

4 1 Sale of finished goods

Sample Problem:

1. Peter Senen manufactures a product known as “Sweet Melody Lotion”. The transactions for the
month of March 2020 were as follows:
 Purchase of raw materials P1,000,000
Labor/Wages incurred 300,000
Factory overhead incurred 400,000
Units completed 50,000 units
Units sold 49,900 units

There are no beginning inventories of raw materials, work in process and finished goods. The standard
cost per unit of output is P34.80 (P19.80 for raw materials and P15 for conversion costs, of which P6 is
for labor cost.

Required: Prepare the journal entries if:

a. Using Traditional costing
b. Back flush costing using three trigger points (purchases, completion of goods and upon sale)
c. Back flush costing using two trigger points (purchase and upon sale)
d. Back flush costing using two trigger points (completion of goods and upon sale)
e. Back flush costing using one trigger point

Solutions

a. 1. Raw Materials P1,000,000

Accounts payable P1,000,000

2 Work in Process (50,000 X P19.80) 990,000

Raw Materials 990,000

3. . Work in Process 300,000

Accrued Wages 300,000

4. Factory Overhead 400,000

Various 400,000

5. Work In process (50,000 X P9) 450,000

FOH Applied 450,000

6. Finished Goods 1,740,000

Work in Process 1,740,000

7. COGS 1,736,520
Finished Goods 1,736,520
(49,900 X P34.80)

8. FOH Applied 450,000

FOH 400,000
COGS 50,000
b. Back flush- Three Trigger Points

1. Raw in process (RIP) Inventory P1,000,000

Accounts Payable P1,000,000

2. Conversion Cost 700,000

Accrued Payroll 300,000
Various 400,000

3. Finished Goods 1,740,000

RIP Inventory 990,000
CC Applied (50,000 X P15) 750,000

4. COGS 1,736,520
Finished Goods 1,736,520

5. Overhead Applied CC 50,000

COGS 50,000

c. Back flush- Two Trigger Points (Purchases and Sale)

1. RIP Inventory 1,000,000

Accounts Payable 1,000,000

CC 700,000
Accrued payroll 300,000
Various 400,000

2. Finished Goods ( 100 X P34.80) 3,480

COGS (49,900 x p34.80) 1,736,520
RIP Inventory 990,000
CC Applied 750,000

Overhead Applied CC 50,000

COGS 50,000

d. Back flush-Two Trigger Points (Completion and Sale)

CC 700,000
Accrued Payroll 300,000
Various 400,000

1. RIP Inventory 10,000

Finished Goods ( 50K X P34.80) 1,740,000
Accounts Payable 1,000,000
CC Applied ( 50K X P15) 750,000
2. COGS 1,736,520
Finished Goods 1,736,520

` Overhead Applied CC 50,000

COGS 50,000

e. Back flush- One Trigger Point

CC 700,000
Accrued Payroll 300,000
Various 400,000

1. Raw in Process (RIP) Inventory 10,000

Finished Goods 1,480
COGS 1,736,520
Accounts Payable 1,000,000
CC Applied 750,000

` Overhead Applied CC 50,000

COGS 50,000

The ledger accounts in respect of the above transactions show the following:

RIP Inventory P10,000

Finished Goods 3,480
CC-overapplied 50,000

2.The Peter Senen Manufacturing Company uses a raw and in process (RIP) inventory account and
expenses all conversion costs to the cost of goods sold account. At the end of each month, all
inventories are counte, their conversion cost components are estimated, and inventory account
balances are adjusted accordingly. Raw materials cost is back flushed from RIP to Finished Goods. The
following information is for the month of April:

Beginning balance of RIP account, including P1,400 of conversion cost P31,000

Raw materials received on credit 367,000
 Ending RIP inventory per physical count, including P1,800 conversion cost estimate 33,000

Required:
Compute the amount to be back flushed from RIP to finished goods.

Solution:
Beginning balance of RIP account (P31, 000-P1,400) P29,600
Add: Raw materials received on credit 367,000
Total P396,600
Less: Ending balance of RIP inventory per physical
Count (P33,000-1,800) 31,200
Amount to be back-flushed P365,400

3. The JYD Manufacturing Company produces only for customer order and most work is shipped
within thirty-six hours of the receipt of an order,. JYD uses a raw and in process (RIP) inventory account
and expenses all conversion costs to the cost of goods sold account. Work is shipped immediately upon
completion, so there is no finished goods account. At the end of each month, inventory is counted, its
conversion cost component is estimated, and the RIP account balance is adjusted accordingly. Raw
material cost is back flushed from RIP to Cost of goods sold. The following information is for the month
of May.
Beginning balance of RIP account, including P1,300 of conversion cost P12,300
Raw materials received on credit 246,,000
Ending RIP inventory per physical count, including P2,100 conversion cost estimate 12,100

Required:
Compute the amount to be back flushed from RIP to Cost of Goods Sold

Solution:

Beginning balance of RIP account (P12,300-P1,300) P11,000

Add: Raw materials received on credit 246,000
Total P257,000
Less: Ending balance of RIP inventory per physical
Count (P12,100-2,100) 10,000
Amount to be back-flushed P247,000

4. Using the data in No. 3, compute the amount of Cost of Goods Sold after all transactions and
adjustments are made.

Solution:
Cost of goods sold P247,000
Less; adjustments in conversion cost
(2,100-1,300) 800
Adjusted COGS P246,200

5. Petesy, general manager of Peter Senen Corporation, has provided the following information
for transactions that occurred during March. The Corporation 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 factory 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: Compute the March 31 balance in the Conversion Cost.

Solution:

Actual Factory Overhead P225,000

Direct Labor Costs incurred 77,000
Total actual conversion costs P302,000
Less; Applied Conversion costs to production 300,000
March 31 Conversion Cost balance-debit U P 2,000

6. Using the same information in No. 5, compute the March 31, balance in the Finished goods
account.
Solution:

Amount to be back flushed from RIP to Finished Goods P 97,000

Applied Conversion Costs to production 300,000
March 31 Finished Goods balance, debit P397,000

7. Ethel, owner of Ethel Corporation, has provided the following information for transactions that
occurred during August. The Corporation uses a JIT costing system.

a. Raw materials were purchased at the cost of P950,000

b. All materials purchased were requisitioned for production.
c. Direct labor costs of P2,500,000 were incurred
d. Actual factory overhead costs amounted to P6,000,000
e. Applied conversion costs totaled P8,100,000. This included P2,500,000 of direct labor
f. All units were completed.

Compute the amount to be back flushed from RIP to Finished Goods

Solution:
Raw materials purchased were requisitioned
For production P950,000

(No RIP beg and ending balance)

8. Using the same information in No. 7, compute the amount of Finished Goods after all transactions
have been completed.

Solution:
Amount to be back flushed from RIP to Finished Goods P950,000
Applied conversion costs to production 8,100,000
Amount of Finished Goods P9,050,000