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JUST-IN-TIME AND BACKFLUSH ACCOUNTING
LEARNING OBJECTIVES
Upon completion of this chapter,you should be able to
Understand the JIT philosophy
Know and understand the five key elements involved in the operation of a
JIT system
Differentiate the JIT system from the traditional costing system
Just-in-time means that 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.The
JIT manufacturing philosophy originated in Japan(primarily by Toyota and
Kawasaki)
and is being increasingly utilized by American manufacturing
companies
JIT requires raw materials to be delivered at exactly the points they are
needed,
and just when they are needed to initiate production.Partially processed goods
are
expected to move through the factory in such a way that goods come out of
one
operation just in time to be processed in the next operation.JIT calls also for
the
transfer of finished goods directly to the vehicles used to deliver them to
customers,rather than to storage.Such arrangement completely eliminates the
need for the warehouse space that has been considered an expensive part of
any
manufacturing operation.It also reduces the cost of handling,from the point of
delivery of raw materials to the point where the finished product is shipped to
the
customer.Goods would be handled less often and the smaller quantities
involved
might eliminate the need for expensive bulk-moving equipment(such as
forklifts).
JIT manufacturing is characterized by decisions made by companies to
intentionally maintain relatively small inventory levels.Companies
manufacturing
inventory under the JIT philosophy attempt to 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.Thus,inventory production.is
normally"on demand".This type of production is consistent with the
production
process that is used by companies which wait for the receipt of customer
orders
before beginning production such as:custom furniture manufacturers,custom
Shipbuilders and custom homebuilders.
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162
Cost Accounting
are
The distinguishing characteristic of Ii cosing is that prodsstioeri
iaein ohtenitie ofr g oftheproduction process.ise na ionale
iaupSuenb(ue )l ei
taterials,work-in-prooei an bastirs goods inventories will be maintained.
inceassumes that the work-in-process and finished good mnvemion a
aintained by the organization will beminimal,labor and overhead are
moomally
Bocumulated directly in cost of goods sold account.At the end of the
period,the e
abor and overhead costs associated with any unsold or uncompleted items are
“backed out”and included
in either finished goods or work-in-process,
respectively.For this reason,JIT costing is often referred to as backflush
costing.
There are five key elements involved in the operation of a JIT system.
1.A company must learn to rely on a few suppliers who are willing to make
frequent(even daily)deliveries in small lots.
2.A company must improve its product flow lines by creating an individual
flow line for each separate product.
3.A company must reduce the setup time between production runs.One way
to do this is through employee training.
Another way is through
automation by creating a flexible manufacturing system(FMS).An FMS
is just one part of the overall concept of computer-integrated
manufacturing,in which a company's business functions are integrated
with its manufacturing functions.
4.A company must develop a system of total quality control(TQC)over its
parts and materials.In the absence of TQC,it would be impossible to
successfully implement a JIT system.TQC starts with suppliers,who
must inspect goods before they are shipped to ensure that the goods are
free of defects.The company's own employees are responsible to inspect
their own work before sending partially completed units on to the next
workstation.
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163
Chapter 6 Just in Time and Backflush Accounting
5.A company must develop a flexitle work force.Since the plant layout in
JiT environment is different from that of a conventional factory,workers
must be multi-skilled.In addition to being able to operate al of the
machines in a manufacturing cell,workers must also be able to perform
routine maintenance on these machines.
An individual firm in the present environment can,by careful scheduling of
production based on market projections(or,even better,based on actual orders),
reduce the level of finished goods inventory.By using such production
schedules
and working with a limited number of suppliers of raw materials,the level of
raw
materials inventory can also be minimized.Processing time and the amount of
work-in-process inventory can also be minimized by rearranging production
facilities into manufacturing cells(minifactories)which include all the
machines
required to produce a particular part.Such an arrangement reduces the amount
of
movement partially-processed units required in the production process.
Just-in-time(JIT)costing differs from traditional costing with regards to the
accounts used and the timing of cost recording.There are basically three major
differences.
1.Instead of using separate accounts for Material and Work in Proces as in
traditional costing JIT costing combines these into a Raw and in Process
account.
2.Direct labor is usually considered a minor cost itme in a JIT setting so no
separate account for direct labor is created.Direct labor and factory
overhead are usually charged to a Conversion Cost account or sometimes
direct to Cost of Goods Sold account.
3.In traditional costing overhead is applied to products as they are being
produced and is recorded into the Work in Process account.In JIT
costing,overhead is not applied to production until they are completed.
When products are completed under JIT costing,labor and overhead is
added to Cost of Goods Sold,since the goods are sold soon after
production is completed
Page 4 Eactory Overhead
164 372,000
Cost Accounting 372,000
To compare JIT costing with traditional costing asume that TRAMs io 122,000
manufachures cellutar tofenonth ndition n produetion system.The following 122,000
transactions occurred during January. 红
A.Trams purchased P170,000 of raw materials. 9
B.All materials purchased were requistioned for production ccrued Payroll
C Cost of Goods Sold
Trams incurred direct labor costs of P 80,000 80,000
D 372,000
Actual factory overhead costs amounted to P 122,000 Under JIT costing,no entries are made for transaction b,c,and e.Entry b is not
E Trams applied conversion costs total P 202,000(including direct labor necessary because the placement of materials into production is implied in
cost of transaction(a)when the materials are first received.No separate entry is made
P80,000) for
F.All telephones were completed and sold. （c)because direct labor is combined with factory overhead and maybe
debited first
The transactions would be recorded in a traditional costing system as follows:
to conversion cost or maybe debited direct to cost of goods sold.
A.Materials
The JIT costing system would record the January transactions in the following
170,000
manner.
Accounts Payable
A.Raw and In Process
170,000
170,000
B.Work in Process
Accounts Payable
170,000
170,000
Materials
C.Conversion Cost
170,000
80,000
C.Work in Process
Accrued Payroll
80,000
80,000
Accrued Payroll
D.Conversion Cost
80,000
122,000
D.Factory Overhead
Miscellaneous Accounts
122,000
122,000
Miscellaneous Accounts
122,000
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E.Work in Process
166
122,000
Cost Accounting
Factory Overhead
F.Cost of Goods Sold
122,000
372,000
F.Finished Goods
170,000
372,000
Raw and In Process
Work in Process
202,000
372,000
Conversion Cost
Cost of Goods Sold
The general ledger(T-accounts)will appear as follows:
372,000
Raw and in Process
Finished Goods
Conversion Cost
372,000
170,000
170,000
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202,000
165
202,000
Chapter 6 Just in Time and Backflush accounting
Cost of Goods Sold
The general ledger(T-accounts)will appear as follows:
Wages Pavable
Materials
C
Work in Process
372,000
170,000
80,000
2,000
SUMMARY OF COST FLOWS IN JIT COSTING
170,000 b)
Direct materials
170,000
Direct labor and
0
costs
80,000
overhead costs
122,000
口 Work in process

Einished Goods Finished goods

Cost of goods Page 8
inventory 168
inventory Cost Accounting
sold Materials received
Labor and overhead 4,000
costs relating to Less:Mat.In RIP
unsold units 1,500
Labor and overhead Amount to be backflushed
costs relating to 2.500
uncompleted units 000'T
0 4.Cost of goods sold
000'T
Page 7 Finished goods
Chapter 6 Just in Time and Backflush Accounting To record transfer of units sold
167 Materials cost of units comp
LLLUSTRATIVE PROBLEM 2,500
Assume that Wilkins Company uses JIT costing for the production of goods Less:Mat.in FG end
during 1.500
the month of January.The following transactions summarize the major steps in Amount to be backflushed
Wilkins'production during the month of January. 1.000
1.Raw materials received from suppliers amounted to P4,000. 5.Raw and in Process
2.Direct labor costs of P10,400 and overhead costs of P7,800 were incurred 2,100
and applied,respectively,during the month of January. Finished goods
3.The cost of work-in-process at January 31 was P3,600.This cost was 5,000
determined through the production report and is composed of the Cost of goods sold
following elements: 7,100
Direct materials To adjust cost of goods sold
P For Raw and In Process:
1,500 Labor cost-raw and in process
Direct labor 1,200
1,200 Overhead-raw and in process
Overhead 006
900 Total to be adjusted
In addition,assume that finished goods inventory at January 31 was' P6,500, 2.100
consisting of: For Finished goods
Direct materials Labor cost-finished goods
P 2,850
1,500 Overhead-finished goods
Direct labor 2,150
2,850 Total to be adjusted
Overhead 5000
2,150 Backflushing
The journal entries under JIT costing are shown below.. Backflushing is also known as backflush costing or backflush accounting.It is
1.Raw and in Process a
4,000 shortened version of the traditional method of accounting for cost.Under job
Accounts Payable order
4.000 costing and process costing numerous subsidiary records of the cost of the
work in
To record product costs
process are maintained and these fecords are updated by many accounting
2.Cost of goods sold entries.
18,200 Under JIT system,where the time from the receipt of the materials to the
Wages payable completion of produet is imdraceu io a few hours,the usefulness of tracking
10,400 the
Factory Overhead Control cost of the WIP becomes impractical
7,800
To record product costs Page 9
3.Finished goods 691
2,500 Chapter 6 Just in Time and Backflush Accounting
Raw and in Process The purpose of backflush costing is to simplify and to reduce the number of
2,500 events
To record transfer of cost of units completed that are measured and recorded in the accounting system.If we compare it to
job
order costing and process costing,it will be noted that there is no detailed
tracking
of the cost of work in process.Under backflush costing the inventories are not
adjusted during the accounting period to reflect the different production costs,
instead adjustments are made at the end of the period.Detained subsidiary
records
are not maintained of units in process.
Backflush costing eliminates some of the accounting steps under traditional
costing
and some of the general ledger accounts are combined into one.Example will
be
the materials account and work in process account which are combined into
one
account-Raw and In Process.Raw materials received are put immediately into
production so materials and work in process are combined in a single account.
Under job order costing and process costing,the cost of the completed units is
determined by assigning the three elements of cost-direct materials,direct
labor
and factory overhead-to the work in process at various stages during
production.
Under backflush costing some or all elements of the cost of output are
determined
only after the production is completed.