Chapter 12

JUST IN TIME AND BACKFLUSH COSTING

Just In Time Control System

The JIT control system is based on a philosophy that inventory is undesirable. Subscribers to the JIT
philosophy believe inventory reductions expose organizational problems and inefficiencies. These
problems and inefficiencies may not be brought to management's attention if inventories are not
pushed to lower and lower levels. They would remain hidden and undetectable at higher levels of
inventory.

Three Primary Goals of Just in Time Philosophy

1. Elimination of any production process or operation that does not add value to the product or
service.
2. Continuous improvement in production/performance efficiency.
3. Reduction in the total cost of production/performance while increasing quality.

JIT Push Inventory Control System

Larger levels of inventory exist by design in push production control systems. The inventory buffers
permit lower levels of communication between business segments, permit longer production runs,
and protect the firm from environmental uncertainties and unforeseen interruptions in production
or supplies.

Meaning of “Pull” in the context of production control

Pull simply refers to the fact that the pace and level of production are geared to product demand.
Each work center sets the pace for the next upstream work center. Customer demand paces the
final downstream work center.

JIT and Supplier Relationship

The JIT manufacturer will limit the number of suppliers to a few. Long-term contracts are entered
into with suppliers. Suppliers' raw material must be top quality with no defects.

Small quantities of raw material are delivered frequently and little or no raw material is maintained
by the buyer.

Suppliers must be located close enough to the JIT buyer to deliver small quantities very quickly. The
supplier must agree to providing a top-quality product to its JIT customer.

The Importance of Proximity with supplier under the JIT System

The geographical proximity is important to minimize shipping and handling costs of supplies and
materials. Geographical proximity also facilitates frequent communication and joint planning
between a supplier and customer.

The Necessity of Adjustments to the Accounting System

JIT production control systems foster automation and reduced levels of inventory. Consequently,
raw material inventories and direct labor costs may be too small to warrant separate cost pools-
they can be combined with other cost pools.

Additional adjustments may be necessary to accommodate standard costs, which are constantly
adjusted to reflect the latest technological changes in production methods. Also, more costs could
be traced to specific products and fewer costs would have to be allocated.

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Backflush Costing
Backflush costing is an accounting method that relies on post-deduction approach to establish
inventory figures. Backflush is employed under JIT systems wherein inventory turn-over is fast and
inventory levels are low. A distinctive feature of this costing method includes the following:
1. Merger of the raw materials account and the work-in-process account into Raw and In Process
account.
2. Conversion costs are expensed to cost of goods sold.
3. Estimation of inventory balances at year-end and end-period adjustments of the accounts to
reflect the estimates.

Illustration:
Robotic, Inc. employs a JIT system hence inventory takes only a maximum of 2 days in production.
Robotic, Inc. backflush raw materials cost from the “raw and in progress accounts to finished goods,
and from finished goods to cost of goods sold based on monthly physical count. Direct labor and
conversion costs are expensed to the cost of goods sold account.

January 1 January 31
Raw and in process P 21,000 P 23,000
Finished goods 170,000 174,000
Supplies 20,000 5,000

The RIP, beg consisted of P20,100 cost of materials, most of which were not yet in process, plus a
P900 conversion cost estimate assigned to partially processed work. The finished goods balance
consisted of P84,000 material cost and an P86,000 estimate of conversion cost.

The RIP, end is composed of P21,600 cost of materials which were not yet in process, plus a P1,400
conversion cost estimate assigned to partially processed work. The finished goods amount
consisted of P85,800 cost and an P88,200 estimate of conversion cost.

The following transactions occurred during the year:

1. Received a P406,000 direct material from suppliers on account.
2. Issued P15,000 indirect material (supplies) into production.
3. Gross payroll of P160,000 is incurred.
4. The payroll is distributed as follows:
a. Direct labor, P25,000
b. Indirect factory labor, P45,000
c. Marketing salaries, P50,000
d. Administrative salaries, P40,000
5. Other factory overhead cost of P300,000 were incurred

The following T-accounts splitting inventories into its components are shown:

RIP – materials FG – materials

P 20,100 P 21,600 P 84,000 P 85,800

(1) P 406,000 404,500 404,500 COGS 402,700

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 RIP – conversion costs FG – conversion costs

P 900 P 1,400 P 86,000 P 88,200

Journal Entries:
1. Raw and In Progress 406,000
Accounts payable 406,000

2. Cost of goods sold 15,000

Supplies 15,000

3. Payroll 160,000
Accrued payroll 160,000

4. Cost of goods sold 70,000

Marketing expense 50,000
Administrative expense 40,000
Payroll 160,000

5. Cost of goods sold 300,000

Various accounts 300,000

6. Finished goods 404,500

Raw and in process 404,500
To backflush RM costs to finished goods

7. Cost of goods sold 402,700

Finished goods 402,700
To backflush RM cost to cost of goods sold

8. Raw and in process 500

Finished goods 2,200
Cost of goods sold 2,700
To adjust ending inventories for the conversion costs

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PROBLEM 12-1 TRUE OR FALSE:
Instruction: In the space provided before the statement, write T if the statement is correct or F if
the statement is incorrect.
___1. In a just-in-time (JIT) environment, the optimal situation is to have only one vendor for any
given item.
___2. In a just-in-time (JIT) environment, design changes may be made at any time during the
production process.
___3. In a just-in-time (JIT) environment, design changes must be made early in the production
process.
___4. In a just-in-time (JIT) environment, quality is determined continually during the
manufacturing process.
___5. In a just-in-time (JIT) environment, quality is determined at quality control checkpoints in
the manufacturing process.
___6. In a just-in-time (JIT) environment, machines and workers are often rearranged into
manufacturing cells.
___7. In a just-in-time (JIT) environment, end-of-period variance analysis and reporting does not
occur.
___8. Backflush costing requires fewer allocations than traditional accounting methods.
___9. Lean manufacturing and just-in-time (JIT) systems are both concerned with reduction of
inventory levels.

PROBLEM 12-2 MULTIPLE CHOICE

Instruction: Encircle the letter that corresponds to the letter of your choice.
1. In a JIT system, the quality of each product begins with
a. a company's vendors.
b. employees.
c. inspection of finished goods inventory.
d. a good product warranty.

2. Reducing setup time is a major aspect of

a. all push inventory systems.
b. the determination of safety stock quantities.
c. a JIT system.
d. an EOQ system.

3. Reducing inventory to the lowest possible levels is a major focus of

a. JIT.
b. push inventory systems.
c. EOQ.
d. ABC.

4. JIT is a philosophy concerned with

a. when to do something.
b. how to do something.

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 c. where to do something.
d. how much of something should be done.

5. When JIT is implemented, which of the following changes in the accounting system would not
be expected?
a. fewer cost allocations
b. elimination of standard costs
c. combining labor and overhead into one product cost category
d. combing raw material and materials in work-in-process into one product cost
category

6. Striving for flexibility in the number of products that can be produced in a short period of time
is characteristic of
a. EOQ systems.
b. push systems in general.
c. JIT.
d. pull systems in general.

7. Just-in-time (JIT) inventory systems

a. result in a greater number of suppliers for each production process.
b. focus on a "push" type of production system.
c. can only be used with automated production processes.
d. result in inventories being either greatly reduced or eliminated.

8. The JIT philosophy does not focus on

a. standardizing parts used in products.
b. eliminating waste in the production process.
c. finding the absolute lowest price for purchased parts.
d. improving quality of output.

9. In a JIT manufacturing environment, product costing information is least important for use in
a. work in process inventory valuation.
b. pricing decisions.
c. product profitability analysis.
d. make-or-buy decisions.

10. With JIT manufacturing, which of the following costs would be considered an indirect product
cost?
a. cost of specific-purpose equipment
b. cost of equipment maintenance
c. property taxes on the plant
d. salary of a manufacturing cell worker

11. With JIT manufacturing, which of the following costs would be considered a direct product
cost?
a. insurance on the plant
b. repair parts for machinery
c. janitors' salaries

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 d. salary of the plant supervisor

12. Which of the following statements is not true?

a. JIT manufacturing strives for zero inventories.
b. JIT manufacturing strives for zero defects.
c. JIT manufacturing uses manufacturing cells.
d. JIT manufacturing utilizes long lead time and few deliveries.

13. The JIT environment has caused a reassessment of product costing techniques. Which of the
following statements is true with respect to this reassessment?
a. Traditional cost allocations based on direct labor are being questioned and criticized.
b. The federal government, through the SEC, is responsible for the reassessment.
c. The reassessment is caused by the replacement of machine hours with labor hours.
d. None of the above is true.

14. When a firm adopts the just-in-time method of management,

a. employees are retrained on different equipment, but the plant layout generally
remains unchanged.
b. new machinery and equipment must be purchased from franchised JIT dealers.
c. machinery and equipment are moved into small autonomous production lines called
islands or cells.
d. new, more efficient machinery and equipment are purchased and installed in the
original plant layout.

15. Which of the following describes the effect on direct labor when management adopts the JIT
philosophy?
a. Each direct labor person performs a single task, thereby allowing that person to
reach his or her theoretical potential.
b. Because each person runs a single machine in a JIT environment, there are more
employees classified as direct labor.
c. The environment becomes more labor-intensive.
d. Machine operators are expected to run several different types of machines, help set
up for production runs, and identify and repair machinery needing maintenance.

16. JIT concepts

a. can be effectively implemented in organizations that are only partially automated.
b. are only appropriate for use with CIM systems.
c. involve shifting from a capital-intensive to a labor-intensive process.
d. require full computerization of the JIT manufacturing process.

17. According to JIT philosophy,

a. inventories of finished goods always should be available to meet customer demand.
b. push-through manufacturing flows are the most efficient.
c. maintaining inventories wastes resources and frequently covers up poor work or
other problems.
d. long production runs and large production lot sizes take advantage of economies of
scale.

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18. Accounting for product costs in a JIT environment
a. uses a job order costing system.
b. classifies processing costs as raw (or direct) material, direct labor, and overhead.
c. is more complex than in other types of manufacturing environments.
d. follows process costing procedures whereby costs are accumulated by the process
(cell) and attached to units processed for the period.

19. An implication of the demand-pull nature of the JIT production process is that
a. finished goods inventories must be available to meet customer demand, although
raw material is delivered on an as-needed basis.
b. more storage space for inventories is necessary.
c. finished products are packaged and shipped to customers immediately, thus
requiring minimal finished goods inventories.
d. problem areas become less visible as inventories are reduced.

20. In accounting for JIT operations, the Raw Material Inventory account
a. is closely monitored to ensure that materials are always on hand in time.
b. can be expected to have a larger balance than with traditional manufacturing
methods.
c. is combined with the Work In Process Inventory account.
d. is combined with the Finished Goods Inventory account.

21. Backflush costing is concerned with which of the following?

Standard costs Minimal variances from standards

a. yes no
b. no no
c. yes yes
d. no yes

22. The JIT philosophy indicates that inventory, as well as which of the following, should be
eliminated?
Business-Value-
Suppliers Storage Employees Added Activities

a. yes yes yes yes

b. yes yes no no
c. no no yes no
d. no yes no yes

23. Accounting for Just-In-Time operations requires fewer transactions because

a. large batches of inventory are combined in a smaller number of transactions
b. costs are accumulated in departments and then transferred to the next department
c. combined material and conversion costs are transferred to finished goods.

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 d. costs are transferred from department to department thus allowing for better controls in
costs

24. Just-In-Time accounting has fewer transactions because

a. all manufacturing costs are combined in one account called Raw and In Process Inventory
b. employees in production cells are required to perform various tasks, some are considered
direct costs and some are indirect costs. Therefore the distinction is eliminated.
c. Less movement of inventory between department to department.
d. All of the above.

25. The budgeted cell conversion cost rate includes which of the following?
a. factory overhead only
b. direct labor and direct materials only
c. direct labor, direct materials, and factory overhead
d. direct labor and factory overhead only

PROBLEM 12-3
Instruction: Solve the following problem on a separate worksheet.

The Nite Lite Company has budgeted its conversion cost for the small lamp production as P58,000
for 1,200 production hours. Each unit produced by the cell requires 20 minutes of process time.
During the month, 3,500 units are manufactured in the cell. the estimated material costs per unit is
P17.00.

Provide the following journal entries.

a. Materials are purchased to produce 3,600 units.
b. Conversion costs are applied to3,500 units of production.
c. 3,400 units are placed into finished goods.

PROBLEM 12-4
Instruction: Solve the following problem on a separate worksheet.

Weloc Company produces parts for the auto industry. Part X2 is machined in Department #1, which
has the following budgeted conversion costs:

Labor P220,000
Depreciation 30,000
Maintenance 10,000
Supplies   25,600
Total P285,600

All costs are driven by machine hours. Total possible hours for the year are 2,400. It takes .03 hours
to machine one unit of Part X2.

Required:
(a) Compute Department #1's budgeted cell conversion cost rate for the current
year.
(b) Compute Part X2's budgeted cell conversion cost per unit.

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PROBLEM 12-5
Instruction: Solve the following problem on a separate worksheet.

Fashion Pattern Company makes dressmakers' patterns using a machine that stamps the pattern
outline onto tissue paper. The stamping center produced 30,000 patterns in August, with a machine
time per pattern of 15 seconds. Annual budgeted cell conversion costs were as follows:

Maintenance and supplies P 480,000

Depreciation 600,000
Supporting labor     816,000
Total P 1,896,000

Fashion planned 2,000 total machine hours for the year.

Required: Calculate Fashion's budgeted cell conversion cost rate for the year.

PROBLEM 12-6
Instruction: Solve the following problem on a separate worksheet.

The Jackson Co. operates in a just-in-time (JIT) manufacturing environment. During 2008, its first
year of operations, Jackson budgeted for 40,000 hours in the production of 100,000 units in its cell
X-22. Material costs were P7 per unit. Cell X-22 conversion costs were budgeted for the year as
follows:

Direct and indirect labor P 900,000

Machine depreciation 125,000
Maintenance and supplies 375,000
Utilities 225,000
Total P1,625,000

During January, 8,200 units were manufactured, and 8,000 were sold shipped to customers for and
P35 each. For the month of January, journalize:
1. the material purchases
2. application of conversion costs
3. the transfer from work in process to finished goods; and
4. to record the sales and associated cost of goods sold

PROBLEM 12-7 MULTIPLE CHOICE

Instruction: Encircle your answer and show all necessary solutions on a separate worksheet.

1. Recon Co. operates in a just-in-time (JIT) manufacturing environment. For June production,
Recon purchased 2,000 units of raw materials at P6.00 per unit. The journal entry required to
record this transaction is:

a. Raw Materials Inventory 12,000

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 Accounts Payable 12,000
b. Cost of Goods Manufactured 12,000
Accounts Payable 12,000
c. Finished Goods 12,000
Accounts Payable 12,000
d. Raw and In Process Inventory 12,000
Accounts Payable 12,000

2. Mitchell Manufacturing operates in a just-in-time (JIT) manufacturing environment. Mitchell's

actual conversion costs for the month of April follow:

Direct and indirect labor P120,000

Machine depreciation 85,000
Maintenance and supplies    60,000
Total conversion costs P265,000

The journal entry to record April's conversion costs will include:

a. a debit to Work in Process Inventory
b. a debit to Raw Materials Inventory
c. a credit to Raw and In Process Inventory
d. a debit to Raw and In Process Inventory

3. Foley Electronics Corporation manufactures and assembles electronic motor drives for video
cameras. The company assembles the motor drives for several accounts. The process consists of
a just-in-time cell for each customer. The following information relates only to one customer's
just-in-time cell. For the year planned labor and overhead was P76,800,000; materials costs,
P25 per unit. Planned production included 9,600 hours to produce 76,800 motor drives. Actual
production for the month of August was 5,200 units, and motor drives shipped amounted to
5,040 units. From the foregoing information, determine the budgeted cell conversion cost per
hour.
a. P8,800 c. P7,200
b. P800 d. P8,000

4. Foley Electronics Corporation manufactures and assembles electronic motor drives for video
cameras. The company assembles the motor drives for several accounts. The process consists of
a just-in-time cell for each customer. The following information relates only to one customer's
just-in-time cell for the coming year. Projected labor and overhead, P4,800,000; materials costs,
P25 per unit. Planned production included 2,400 hours to produce 19,200 motor drives. Actual
production for August was 1,300 units, and motor drives shipped amounted to 1,260 units.

From the foregoing information, determine the budgeted cell conversion cost per unit.
a. P250.00 c. P308.00
b. P267.00 d. P317.00

5. From the foregoing information, determine the manufacturing cost per unit.
a. P292.00 c. P333.00
b. P275.00 d. P342.00

6. From the foregoing information, determine the amount of the conversion costs charged to Raw
and In Process Inventory during August.

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 a. P440,000 c. P360,000
b. P400,000 d. P325,000

7. From the foregoing information, determine the production costs transferred to Finished Goods
during August.
a. P346,500 c. P357,500
b. P412,500 d. P400,000

8. From the foregoing information, determine the production costs transferred to Cost of Goods
Sold during August.
a. P357,500 c. P400,000
b. P412,500 d. P346,500

9. Ambiong Company operates a demand-pulled manufacturing system wherein delivery is made

within 24 hours from the receipt of a customer order. Ambiong maintains a Raw and In Process
account and expenses all conversion costs to cost of goods sold. No finished goods account is
maintained since all production runs are immediately delivered. At the end of each month, the
conversion costs is estimated in ending inventories and the Raw and In Process account is
adjusted accordingly. Raw material cost is backflushed to cost of goods sold. The following
information is for the month of May:
Raw and In process, beginning (with P1,300 conversion costs) P 12,300
Raw materials received from suppliers 246,000
Conversion costs incurred 60,000
Raw and In process, end, per count (with estimated P2,100 conversion costs) 12,100
Compute the amount to be backflushed from Raw and In Process to Cost of Goods Sold.
a. P246,000 c. P247,000
b. P246,200 d. P245,000
10. Compute the amount of cost of goods sold after all adjustments
a. P306,000 c. P307,000
b. P306,200 d. P246,200
11. Toyota Manufacturing Company (TMC) has a demand pulled manufacturing process. Goods
completed are immediately delivered to customers thereby it does not maintain a finished
goods account. TMC uses a raw and in process (RIP) account to record raw materials and in-
process items. At the end of the year, the production engineer of Toyota Manufacturing
Company estimates the RIP account at P120,000. This balance is P20,000 higher than the last
year’s balance. Also P12,000 of this increase is attributable to raw materials in the RIP account.
The journal entry to adjust the records will likely include a
a. debit to RIP.
b. debit to COGS
c. credit to materials
d. credit to conversion costs

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