ACCO 20073

BACKFLUSH COSTING

PROBLEM
Mercury Mfg. Company produces finished products within two days of the receipt of raw materials.
Inventory accounts consist of Supplies Inventory account for indirect factory materials, a Finished Goods
Inventory account, and a combined Raw and in Process Inventory account (RIPI). All conversion costs
are charged to the Cost of Goods Sold account. At the end of each month, all inventories are counted,
their conversion costs components are estimated, and inventory account balances are adjusted. Raw
materials costs is backflushed from RIPI to Finished Goods Inventory (FGI) account to Cost of Goods
Sold. The following information is a summary of selected transactions and other information for the
month of August.

Beginning Balances in Inventory accounts:

Raw and in Process Inventory (RIPI) P 41,600
Finished Goods Inventory 370,000
Supplies Inventory 31,000

The August 1, RIPI balance consisted of P40,000 cost of materials, most of which were not yet in
process, plus a P1,600 conversion cost estimate assigned to partially processed work. The Finished
Goods Inventory account balance consisted of P190,000 materials cost and a P180,000 estimate of
conversion cost.

August 31 Inventories based on physical count:

Raw and in Process Inventory P 47,900
Finished Goods Inventory 360,000
Supplies Inventory 17,000

The August 31, RIPI amount consisted of a P46,000 cost of materials, most of which were not yet in
process, plus a P1,900 conversion cost estimate assigned to partially processed work. The Finished
Goods Inventory amount consisted of P182,000 materials cost and a P178,000 estimate of conversion
cost.
a. Direct materials received on credit cost P850,000.
b. Indirect materials used cost is P13,000.
c. Gross payroll of P400,000 is accrued; the payroll is paid.
d. The payroll distribution was:
Direct labor P 60,000
Indirect factory labor 120,000
Marketing salaries 130,000
Administrative salaries 90,000
e. Factory overhead cost:
Depreciation 668,000
Insurance 13,000
f. Miscellaneous factory overhead costs:
Paid in cash 54,000
On account 29,000
g. The factory overhead accumulated in the factory overhead control account was expensed to
Cost of Goods Sold.
h. The materials cost component of completed work is backflushed from RIPI to Finished Goods
Inventory.
i. The material cost component of work sold is backflushed from Finished Goods Inventory to
CGS.
j. Ending balances are established in inventory accounts by adjusting their conversion cost
components.
Required:
1. Determine the amount of materials backflushed from RIPI to FGI.
2. Determine the amount of materials backflushed from FGI to CGS.
3. Determine the total cost of goods sold.
4. Journalize all entries.
Just-in-time (JIT) - a philosophy centered on reduction or elimination of inventory.

a philosophy about when to do something

JIT Manufacturing System- a production system that attempts to acquire components and produce
inventory only as needed, to minimize product defects, and to reduce
lead/setup times for acquisition and production.

Backflush costing a streamlined cost accounting method that speeds up, simplifies, and
reduces accounting effort in an environment that minimizes inventory
balances, requires few allocations, uses standard costs, and has minimal
variances from standard.