COST ACCOUNTING

Just in Time and Backflush Costing

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Just in Time Processing

→ JIT manufacturing is dedicated to producing the right products or parts at the right time as they are needed, Under JIT processing, raw
materials are received just in time for use in production, subassembly parts are completed just in time for use in finished goods, and finished goods
are completed just in time to be sold.

SUPPLIER COMPANY CUSTOMER

ORDER = 2,000 pounds ORDER = 1,000 units

PURCHASING PRODUCTION SALES

2,000 pounds 1,000 units 1,000 units

RM, end = 0 WIP, end = 0 FG, end = 0

Primary Objective

→ The objective of JIT system is to eliminate all manufacturing inventories. Inventories are considered to have an adverse effect on net income
because they tie up funds and storage space that could be made available for more productive purposes.

Important Elements of JIT

→ A company must have dependable suppliers who are willing to deliver on short notice exact quantities of raw materials according to
precise quality specifications.
→ A multi-skilled work force must be developed.
→ A total quality control system must be established throughout the manufacturing operations.

Benefits of implementing JIT

→ Manufacturing inventories are significantly reduced or eliminated.
→ Product quality is enhanced
→ Rework costs and inventory storage are reduced or eliminated.
→ Production cost savings are realized from the improved flow of goods through the processes.

Why may a JIT control system be useful in disclosing a firm's inefficiencies and problems?

→ 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.

How does adopting a JIT system affect the firm's relationship with suppliers and how must suppliers change their way of doing business?

→ 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.

Why is it important for a company to be (geographically) close to its suppliers to implement a JIT inventory control 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.

Why might it be necessary to make adjustments to the accounting system in a firm that adopts JIT?

→ 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.

What are the three primary goals of the just-in-time (JIT) 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.

PROBLEM 1

The following balances are given for January 1 and January 31:

January 1
Raw and in Process (Materials, P8,750 and Conversion Costs, P16,250) P 25,000
Finished Goods (Materials, P60,000 and Conversion Costs, P90,000) 150,000

January 31
Raw and in Process (Materials, P10,500 and Conversion Costs, P19,500) P 30,000
Finished Goods (Materials, P63,000 and Conversion Costs, P117,000) 180,000

The following transactions occurred during the month of January:

 Purchase of raw materials, P500,000
 Conversion costs applied to production (DL, P100,000 and FOH, P225,000)

Required: Prepare all the necessary journal entries.

Purchase of raw materials:

RIP (Raw and in Process) 500,000
A/P 500,000

Issuance of raw materials to production:

No entry

Application of conversion costs:

COGS 325,000
Accrued payroll 100,000
FOH-applied 225,000

Backflush entries:

1) To backflush the RM from RIP to FG (RM portion of COGM)

RM-RIP, beg 8,750

RM purchases 500,000
RM-RIP, end (10,500)
RM-COGM 498,250

FG 498,250
RIP 498,250

2) To backflush the RM from FG to RIP (RM portion of COGS)

COGS 495,250
FG 495,250

RM-COGM 498,250
RM-FG, beg 60,000
RM-FG, end (63,000)
RM-COGS 495,250

3) Conversion Costs in RIP, FG:

CC applied (CC-TMC) 325,000

CC-RIP, beg 16,250
3,250 INCREASE
CC-RIP, end (19,500)
CC-COGM 321,750
CC-FG, beg 90,000
27,000 INCREASE
CC-FG, end (117,000)
 CC-COGS (ADJUSTED) 294,750

VS. UNADJ. COGS 325,000

ADJUSTMENT 30,250

RIP 3,250
FG 27,000
COGS 30,250

ADJUSTED COGS = 495,250 + 294,750 = 790,000

PROBLEM 2

The Clifton Manufacturing Company has a cycle time of 1.5 days, uses a Raw and In Process (RIP) account, and charges all conversion costs to Cost
of Goods Sold. At the end of each month, all inventories are counted, their conversion cost components are estimated, and inventory account
balances are adjusted. Raw material cost is backflushed from RIP to Finished Goods. The following information is for May:

Beginning balance of RIP account, including P600 of conversion cost.................................................................. P 5,500

Beginning balance of finished goods account, including P2,000 of
conversion cost............................................................................................................................................... 6,000
Raw materials received on credit........................................................................................................................... 173,000
Ending RIP inventory per physical count, including P850 conversion
cost estimate................................................................................................................................................... 6,200
Ending finished goods inventory per physical count, including P1,550
conversion cost estimate................................................................................................................................. 4,900

Required: Prepare all the journal entries that involve the RIP account and/or the finished goods account.

SOLUTION:

RIP 173,000
A/P 173,000

COGS cannot be determined from the given

ACCRUED PAYROLL information and also not required to
FOH-applied determine in the problem

Backflush entries:

FG (173,000 + 4,900 – 5,350) 172,550

RIP 172,550

COGS (172,550 + 4,000 – 3,350) 173,200

FG 173,200

COGS 200
RIP (850 – 600) 250
FG (2,000 – 1,550) 450

EXERCISES – True or False

1. In a just-in-time environment, the optimal situation is to have only one vendor for any given item. TRUE
2. In a just-in-time environment, design changes may be made at any time during the production process. FALSE
3. In a just-in-time environment, design changes must be made early in the production process. TRUE
4. In a just-in-time environment, quality is determined continually during the manufacturing process. TRUE
5. In a just-in-time environment, quality is determined at quality control checkpoints in the manufacturing process. FALSE
6. In a just-in-time (JIT) environment, end-of-period variance analysis and reporting does not occur. FALSE
7. Backflush costing requires fewer allocations than traditional accounting methods. TRUE
 Multiple-Choice

1. The cost accounting system that significantly reduced inventory carrying costs is called
a. JIT system b. Process costing c. Activity-based costing d. Job order costing

Use the following data in answering questions 2 to 4:

A firm that has implemented JIT had the following transactions:

 Raw materials were purchased on account for P20,000.
 Materials were placed into production.
 Actual direct labor costs were P3,000.
 Actual overhead costs were P20,000.
 Conversion costs applied were P21,000.
 All work was completed for the month.
 All completed work was sold.
 The variance is recognized.

2. What will be the entry to record material purchases using the Backflush approach?
a. Raw and in Process P20,000 c. Accounts Payable P20,000
Accounts Payable P20,000 Raw and in Process P20,000
b. Raw Materials P20,000 d. Accounts Payable P20,000
Accounts Payable P20,000 Raw Materials P20,000

3. What will be the entry to record materials placed into production using the traditional approach?
a. No entry c. Work in Process P20,000
Raw Materials P20,000
b. Raw and in Process P20,000 d. Raw and in Process P20,000
Raw Materials P20,000 Accounts Payable P20,000

4. Using the above information, what will be the entry to record materials placed into production using the backflush approach?
a. No entry c. Work in Process P20,000
Raw Materials P20,000
b. Raw and in Process P20,000 d. Raw and in Process P20,000
Raw Materials P20,000 Accounts Payable P20,000

5. JIT manufacturing differs from traditional manufacturing in all of the following, except
a. the level of inventories
b. the approach of quality control
c. the physical layout of the manufacturing process
d. the treatment of direct materials and direct labor for product costing

6. Zero Company has cycle time of 3 days, uses an RIP account, and charges all conversion costs to COGS. At the end of each month, all inventories
are counted, their conversion costs components are estimated, and inventory account balances are adjusted. Raw material cost is backflushed from
RIP to FG. The following information is for the month of September:

RIP, beginning, including P7,500 of CC P 73,125

FG, beginning, including P25,000 of CC 75,000
Raw materials received on credit 1,406,250
Direct labor 937,500
FOH-applied 1,125,000
RIP, end per physical count, including P21,875 of CC 80,000
FG, end per physical count, including P11,250 of CC 65,625

How much is the conversion costs of the units sold in September?

a. P2,063,125 b. 2,062,500 c. P2,100,000 d. 2,061,875

7. Nica provided the following information for the transaction occurred during August. The production plant uses the JIT costing system.
 Raw materials costing P750,000 were purchased.
 All direct materials costing P750,000 were requisitioned for production.
 Direct labor costs of P500,000 were incurred.
 Actual factory overhead costs amounted to P2,487,500.
 Applied conversion costs totaled P3,250,000. This includes the direct labor cost.
 All units are completed and immediately sold.

The total RIP used to be backflushed to FG and the adjusted COGS, respectively
a. P750,000 & P3,737,500 c. P4,000,000 & P3,737,500
b. P4,000,000 & P4,262,500 d. P750,000 & P4,262,500
8. Lara Co. has a cycle time of 3 days, uses a raw and in process (RIP) account, and charges all conversion cost to Cost of Goods Sold. At the end of
each month, all inventories are counted, their conversion cost components are estimated, and inventory account balances are adjusted. Raw material
cost is backflushed from RIP to Finished Goods.

The following data is for the month of June:

RIP, beginning, including P3,000 CC P 29,250

FG, beginning, including P10,000 CC 30,000
Raw materials received on credit 562,500
Direct labor cost 375,000
FOH-applied 450,000
RIP, end per physical count, including P4,500 CC 32,000
FG, end per physical count, including P8,750 CC 26,250

The material cost of (1) the units completed and (2) the units sold are
a. (1) P 561,250 (2) P 563,750 c. (1) P 588,750 (2) P 581,250
b. (1) P 562,500 (2) P 565,000 d. (1) P 563,750 (2) P 561,250

9. Kuchen Manufacturing uses Backflush costing to account for an electronic meter it makes. During August 2013, the firm produced 16,000 meters of
which it sold 15,800. The standard cost for each meter is:
Direct material P 20
Conversion costs 44
Total P 64

Assume that the company had no inventory on August 1. The following events took place in August:
 Purchased P320,000 of direct materials.
 Incurred P708,000 of conversion costs.
 Applied P704,000 of conversion costs to Raw and in Process Inventory.
 Finished 16,000 meters.
 Sold 15,800 meters at P100 each.

Compute the Finished Goods, ending and the amount of Cost of Goods Sold after the adjustment of over or under-applied conversion costs:
FG, end COGS-adjusted FG, end COGS-adjusted
a. P -0- P 1,015,200 c. P -0- P 1,024,000
b. 12,800 1,011,200 d. 12,800 1,015,200

10. Manny Corporation recently abandoned its traditional production and inventory system in favor of a just-in-time system. The company typically dealt
with 50 suppliers and placed 450 orders throughout the year. All other things being equal, which of the following choices denotes a likely scenario
under the just-in-time system?
Number of Number of
Suppliers Orders
a. 35 200
b. 35 750
c. 50 450
d. 60 200