Bacostmx Module 6 Lecture Jit

JUST IN TIME AND
BACKFLUSH ACCOUNTING
BACOSTMX Module 6
Learning Outcomes:
1. Describe the JIT origin and

philosophy
2. Describe the just-in-case
inventory management model.
3. Discuss just-in-time (JIT)
inventory management.
4. Assess the real-life cases
about the just-in-time (JIT)
Costing Systems of different
companies/industries.
DESCRIBE THE JIT ORIGIN AND
PHILOSOPHY
Learning Outcome 1
Introductory
Quotation
Waste is ‘anything other than the

minimum amount of equipment,
materials, parts, space, and
worker’s time, which are absolutely
essential to add value to the
product.’
— Shoichiro Toyoda
President, Toyota
Cost Accounting and Control 16

-4
• A production system
JIT Origin: which is steeped in the
Toyota philosophy of "the
complete elimination of all
Production waste" imbuing all aspects
System of production in pursuit of
the most efficient
methods.
5
Cost Accounting and Control
JIT Origin:
• Toyota Motor Corporation's
Toyota vehicle production system is a
way of "making things" that is
Production sometimes referred to as a
System "lean manufacturing system"
or a "Just-in-Time (JIT)
system"
6
• This production control
JIT Origin: system has been established
based on many years of
Toyota continuous improvements,
Production with the objective of "making
the vehicles ordered by
System customers in the quickest and
most efficient way, in order to
deliver the vehicles as quickly
as possible."
7
• Management philosophy
of continuous and forced
problem solving
What is • Supplies and
Just-in- components are ‘pulled’
through system to arrive
Time? where they are needed
when they are needed.
Cost Accounting and Control 16-8

Lean Production
• Lean Production supplies

customers with exactly
what the customer wants,
when the customer wants,
without waste, through
continuous improvement.

What Does Just-in-Time Do?
• Attacks waste
– Anything not adding value to the product
• From the customer’s perspective
• Exposes problems and bottlenecks caused by
variability
– Deviation from optimum
• Achieves streamlined production
– By reducing inventory

Types of Waste
• Overproduction
• Waiting
• Transportation
• Inefficient processing
• Inventory
• Unnecessary motion
• Product defects
© 1995
Corel
Corp.

• Traditional: inventory exists in
case problems arise
• JIT objective: eliminate inventory
• JIT requires
– Small lot sizes
Inventory – Low setup time
– Containers for fixed number of
parts
• JIT inventory: Minimum inventory
to keep system running

JIT Inventory Tactics
• Use a pull system to move inventory

• Reduce lot size
• Reduce setup time
• Develop Just-in-Time delivery systems with
suppliers
• Deliver directly to point of use
• Perform-to-schedule
• Reduce setup time
• Use group technology

Lowering Inventory Reduces Waste
Unreliable Capacity
Scrap
Vendors Imbalances

Reducing inventory reveals

problems so they can be solved.
Unreliable Capacity
Scrap
Vendors Imbalances

Reducing inventory reveals

problems so they can be solved.
Unreliable Capacity
Scrap
Vendors Imbalances

DESCRIBE THE JUST-IN-CASE
INVENTORY MANAGEMENT
MODEL
Learning Outcome 2
• Traditional inventory model
based on anticipated demand
• Concerned with managing
Just-In-Case inventory costs
– Types of inventory costs
Inventory • Cost of acquiring
Management inventory (ordering
cost)
• Cost of holding
inventory (carrying cost)
• Cost of not having
inventory on hand when
needed (stock-out cost)
18
1. To balance ordering or setup
costs and carrying costs
Traditional 2.
3.
Demand uncertainty
Machine failure
Reasons 4.
5.
Defective parts
Unavailable parts
for 6.
7.
Late delivery of parts
Unreliable production
Carrying 8.
processes
To take advantage of discounts
Inventory 9. To hedge against future price
increases

DISCUSS INVENTORY POLICY
Learning Outcome 2
• To develop an inventory policy
that deals with the trade-off
between acquisition costs and
Developing carrying costs, the following
questions must be addressed:
Inventory – How much should be ordered
to minimize inventory costs?
Policy
– When should the order be
placed?

Economic
Order • The optimal quantity to order
at one time.
Quantity • Minimizes the total order and
(EOQ) carrying costs over a period of
time.
22
Carrying costs
• Carrying costs are the

costs that a company may
incur in storing materials.
• These costs may include

materials storage and handling
costs, interest, insurance, and
property taxes, loss due to theft,
deterioration, or obsolescence,
and records and supplies
associated with carrying
inventory.

This Photo by Unknown Author is licensed under CC BY-SA
Ordering or
Setup Costs
• Costs of preparing
equipment and facilities so
they can be used to
produce a particular
product or component
• Examples - salaries and wages of

purchasing personnel,
communication costs, and
materials accounting and record
keeping.

METHODS OF COMPUTING
ECONOMIC ORDER QUANTITY
Tabular method
Order size No. of Total order Average Total Total order

orders cost Inventory carrying and carrying
(no. of units (No. of orders cost cost
per order) (10,000/order x P10/order) (Order (average (Total order
size) size/2) inventory x cost + Total
P0.80) carrying cost)
100 100 P1,000 50 P 40 P1,040

300 33 330 150 120 450
500 20 200 250 200 400
700 14 140 350 280 420
900 11 110 450 360 470
Cost Accounting 25
METHODS OF COMPUTING
ECONOMIC ORDER QUANTITY
Formula method
• EOQ = Economic Order Quantity
• S = Cost of placing an order (set-up costs)
• D = Number of units required annually
• H = Annual carrying cost per unit of inventory
𝟐𝑫𝑺
𝑸 = 𝑬𝑶𝑸 =
𝑯
Cost Accounting 26
Important assumptions
1. Demand is known, constant, and
independent
2. Lead time is known and constant
Basic EOQ 3. Receipt of inventory is
Model instantaneous and complete
4. Quantity discounts are not
possible
5. Only variable costs are setup and
holding
6. Stockouts can be completely
avoided
27
Cost Accounting
Inventory Usage Over Time
Usage rate Average

Order inventory
quantity = Q
Inventory level
on hand
(maximum
Q
inventory
level) 2
Minimum
inventory
0
Time
Figure 12.3
Cost Accounting 28
Minimizing Costs
Objective is to minimize total costs
Curve for
total cost of
holding and
Minimum setup
total cost
Annual cost
Holding
cost curve
Setup (or order)

cost curve
Table 11.5
Optimal Order quantity
order
quantity
(Q*)
Cost Accounting 29
The EOQ Model
𝑫
𝑨𝒏𝒏𝒖𝒂𝒍 𝒔𝒆𝒕𝒖𝒑 𝒄𝒐𝒔𝒕 = 𝑺
𝑸
Q = Number of pieces per order

Q* = Optimal number of pieces per order (EOQ)
D = Annual demand in units for the inventory item
S = Setup or ordering cost for each order
H = Holding or carrying cost per unit per year
Annual setup cost = (Number of orders placed per year)

x (Setup or order cost per order)
Annual demand Setup or order

=
Number of units in each order cost per order
= D (S)
Q
Cost Accounting 30
The EOQ Model
𝑫
𝑸
𝑸
𝑨𝒏𝒏𝒖𝒂𝒍 𝒉𝒐𝒍𝒅𝒊𝒏𝒈 𝒄𝒐𝒔𝒕 = 𝑯
𝟐
Annual holding cost = (Average inventory level)

x (Holding cost per unit per year)
Order quantity
= (Holding cost per unit per year)
2
= Q (H)
2
Cost Accounting 31
The EOQ Model
𝑫
𝑸
𝑸
𝑨𝒏𝒏𝒖𝒂𝒍 𝒉𝒐𝒍𝒅𝒊𝒏𝒈 𝒄𝒐𝒔𝒕 = 𝑯
𝟐
Optimal order quantity is found when annual setup cost

equals annual holding cost
D Q
S = H
Q 2
Solving for Q*
2DS = Q2H
Q2 = 2DS/H
Q* = 2DS/H
Cost Accounting 32
An EOQ Example
Determine optimal number of needles to order

D = 1,000 units
S = $10 per order
H = $.50 per unit per year
2DS
Q* =
H
2(1,000)(10)
Q* = = 40,000 = 200 units
0.50
Cost Accounting 33
An EOQ Example

D = 1,000 units Q* = 200 units
S = $10 per order
Expected number Demand

of orders D
=N= Order quantity = Q*
1,000
N = 200 = 5 orders per year
Cost Accounting 34
An EOQ Example

S = $10 per order N = 5 orders per year
Expected time Number of working

between orders = T = days per year
N
250
T= 5 = 50 days between orders
Cost Accounting 35
An EOQ Example

H = $.50 per unit per year T = 50 days
Total annual cost = Setup cost + Holding cost

Q
TC = D S + H
Q 2
1,000 200
TC = ($10) + ($.50) 2
200
TC = (5)($10) + (100)($.50) = $50 + $50 = $100
Cost Accounting 36
Robust Model
• The EOQ model is robust

• It works even if all
parameters and
assumptions are not met
• The total cost curve is
relatively flat in the area
of the EOQ
Cost Accounting 37
An EOQ Example
Management underestimated demand by 50%

D = 1,000 units 1,500 units Q* = 200 units
D Q
TC = S + H
Q 2
200
TC = ($10) 1,500 + ($.50) = $75 + $50 = $125
200 2
Total annual cost increases by only 25%
Cost Accounting 38
An EOQ Example
Actual EOQ for new demand is 244.9 units

D = 1,000 units 1,500 units Q* = 244.9 units
TC = D S + Q H
Q 2 Only 2% less
1,500 244.9 than the total
TC = ($10) + ($.50) cost of $125
244.9 2
when the order
TC = $61.24 + $61.24 = $122.48 quantity was
200
Cost Accounting 39
When to order or
produce
Reorder point
• Point in time when a
new order should be
placed
This Photo by Unknown Author is licensed under CC BY-NC

• The following items need to be
taken into consideration when
ordering:
1. Usage – anticipated rate at
which the material will be used.
2. Lead time – estimated time
interval between the placement
of an order and the receipt of Reorder
the material.
3. Safety stock – estimated
minimum level of inventory
Point
needed to protect against
stockouts.
• (Daily usage X Lead time) +
Safety stock = Order point

41
Reorder Points
❑ EOQ answers the “how much” question

❑ The reorder point (ROP) tells when to
order
Demand Lead time for a

ROP = per day new order in days
=dxL
D
d= Number of working days in a year
Cost Accounting 42
Reorder Point Curve
Inventory level (units)

Q*
Slope = units/day = d
ROP
(unit
s)
Figure 12.5
Time (days)
Lead time = L
Cost Accounting 43
Reorder Point Example
Demand = 8,000 iPods per year

250 working day year
Lead time for orders is 3 working days
D
d= Number of working days in a year
= 8,000/250 = 32 units
ROP = d x L
= 32 units per day x 3 days = 96 units
Cost Accounting 44
• Advantages
– Helps identify the optimal
trade-off between inventory
carrying costs and setup
costs
– Helps deal with uncertainty Advantages
by using safety stock And
• Disadvantages Disadvantages
– Expensive to produce of EOQ Model
variations of a product as the
environment is characterized
by the mass production of a
few standardized products

45
DISCUSS JUST-IN-TIME (JIT)
SYSTEM KEY ELEMENTS
Learning Outcome 2
• Strategic objectives
- To increase profits
- To improve a firm’s competitive
position
• Objectives can be achieved by:
- Controlling costs
JIT Inventory
- Improving delivery performance
Management and quality
• Continual pursuit of productivity
through the elimination of waste
• Integral part of lean
manufacturing

• Manufacturing approach - Pull
system
– Goods should be pulled through
the system by present demand
• Not pushed through the
system on a fixed schedule
based on anticipated JIT Inventory
demand
Management
• Attempts to drive setup and
ordering costs to zero
– Carrying cost is minimized by
reducing inventories to low
levels

48
JIT System Five Key Elements:
1. A company must learn to rely on 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 work station.
5. A company must develop a flexible
work force. Since the plant layout in
JIT environment is different from that
of a conventional factory, workers
must be multi-skilled. In additional to
being able to operate all of the
machines in a manufacturing cell,
workers must also be able to perform
routine maintenance on these
machines.

DIFFERENTIATE THE JIT SYSTEM
FROM THE TRADITIONAL COSTING
SYSTEM
Learning Outcome 2
JIT
Costing vs Just in time costing differs from
traditional costing with regard to the
Traditional accounts used and the timing of
cost recording.
Costing

• There are basically three major
differences: JIT
1. Instead of using separate
Costing vs
accounts for Material and Work
in Process as in traditional
Traditional
costing, JIT costing combines Costing
these into a Raw and in
Process account.

55
2. Direct labor is usually
JIT considered a minor cost time in
a JIT setting so no separate
Costing vs account for direct labor is
created. Direct labor and factory
Traditional overhead are usually charged to
Costing 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 JIT
Process account. In JIT
costing, overhead is not Costing vs
applied to production until they
are completed. When products Traditional
are completed under JIT
costing, labor and overhead is Costing
added to Cost of Goods Sold,
since the goods are sold soon
after production is completed.

57
• Materials are delivered to a
factory immediately prior to
Just-In- their use in production.
Time (JIT) • Reduces inventory carrying
costs.
Materials • Reducing inventory levels
Control through JIT may increase
processing speed.
• Backflush costing is the
accounting system used by
JIT systems.
58
• Backflush costing is a costing
system that omits recording
some or all of the journal
Backflush entries relating to the cycle
costing from purchase of direct
materials (stage 1) to
production resulting in Work
in process (stage 2) to
manufacture of finished goods
(stage 3) and to the sale of
finished goods (stage 4).
59
• When journal entries for one
or more stages in the cycles
Backflush are omitted, the journal entries
for subsequent stage use
costing normal or standard costs to
work backward to flush out the
costs in the cycle for which
journal entries were not made.
• No separate accounting for
work in process is made.
60
• Actual conversion costs are
recorded as incurred, just the
same as conventional recording
systems.
Backflush • Conversion costs are then
applied to products at various
costing trigger points.
• It is assumed that any conversion
costs not applied to products are
carried forward and disposed of
at year end.
• Under backflush costing, costs
are applied to products when
production is completed.
61
Traditional and Backflush Accounting
Systems
• Traditional System • Backflush System
• Materials xx • Raw and In-Process xx

Accounts Payable xx Accounts Payable xx
• Work in Process xx • No entry

Materials xx
• Work in Process xx • Conversion Costs xx

Payroll xx Payroll xx
• Factory Overhead xx • Conversion Costs xx

Various Credits xx Various Credits xx

Traditional and Backflush Accounting
Systems
• Traditional System • Backflush System
• Work in Process xx • No entry

Factory Overhead xx
• Finished Goods xx • Finished Goods xx

Work in Process xx • Conversion Costs xx
Raw and In-Process xx
• Cost of Goods Sold xx • Cost of Goods Sold xx

Finished Goods xx Finished Goods xx

• http://www.toyota-
global.com/company/vision_philosop
hy/toyota_production_system/illustra
tion_of_the_toyota_production_syste
m.html
• De Leon, N., De Leon, G., & De Leon,
Ellery (2015), Cost Accounting. Great
Books Trading Manila
•
References VanDerbeck, J. E., (2011), Principles
of Cost Accounting 15th edition,
Cengage Learning
/ Web • Hansen, D. R. & Mowen, M. M.
(2019), Cost Accounting and
Control, Cengage Learning
sources: • Guerrero, Pedro P. (2016), Cost
Accounting
• Heizer & Render (2004), 5th edition,
Principles of Operations
Management. Prentice Hall

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JUST IN TIME AND

1. Describe the JIT origin and

Waste is ‘anything other than the

Cost Accounting and Control 16

Cost Accounting and Control 16-8

• Lean Production supplies

Cost Accounting and Control 16-9

Cost Accounting and Control 16-10

Cost Accounting and Control 16-11

Cost Accounting and Control 16-12

• Use a pull system to move inventory

Cost Accounting and Control 16-13

Cost Accounting and Control 16-14

Reducing inventory reveals

Cost Accounting and Control 16-15

Reducing inventory reveals

Cost Accounting and Control 16-16

Cost Accounting and Control 19

Cost Accounting and Control 21

• Carrying costs are the

• These costs may include

Cost Accounting and Control 23

• Examples - salaries and wages of

Cost Accounting and Control 24

Order size No. of Total order Average Total Total order

100 100 P1,000 50 P 40 P1,040

Usage rate Average

Objective is to minimize total costs

Setup (or order)

Q = Number of pieces per order

Annual setup cost = (Number of orders placed per year)

Annual demand Setup or order

Annual holding cost = (Average inventory level)

Optimal order quantity is found when annual setup cost

Determine optimal number of needles to order

Determine optimal number of needles to order

Expected number Demand

Determine optimal number of needles to order

Expected time Number of working

Determine optimal number of needles to order

Total annual cost = Setup cost + Holding cost

TC = (5)($10) + (100)($.50) = $50 + $50 = $100

• The EOQ model is robust

Management underestimated demand by 50%

Total annual cost increases by only 25%

Actual EOQ for new demand is 244.9 units

This Photo by Unknown Author is licensed under CC BY-NC

Cost Accounting and Control 40

Cost Accounting and Control

❑ EOQ answers the “how much” question

Demand Lead time for a

Inventory level (units)

Demand = 8,000 iPods per year

Cost Accounting and Control

Cost Accounting and Control 47

Cost Accounting and Control

Cost Accounting and Control 49

Cost Accounting and Control 50

Cost Accounting and Control 52

Cost Accounting and Control 54

Cost Accounting and Control

Cost Accounting and Control 56

Cost Accounting and Control

• Materials xx • Raw and In-Process xx