st Accountin; 166 oe 8 ,000 F. Cost of Goods Sold 372,08" 70,000 Raw and In Process 202,000 Conversion Cost The general ledger (T-accounts) will appear as follows: . version Cost Raw and in Process Con a d D ° ® 372,000 A 80,000 SUMMARY OF COST FLOWS IN JIT COSTING Direct materials Direct labor and costs overhead costs | Work in process inventot Finished goods inventor : Cost of goods sold Labor and overhead. © ~——— costs relating to unsold units Labor and overhead | costs relating to uncompleted unitschapter 6 Just in Time and Backflush Accounting 167° USTRATIVE PROBLEM th oF oe te fol ses JIT costing for the production of goods during #4 nay’ ne following transaction: i i F Wilkins’ production during the month of January, is summarize the major steps in 1. Raw materials received from suppliers amounted to P4,000. 2. Direct labor costs of P10,400 and overhead costs of P7,800 were incurred and applied, respectively, during the month of January. 3. The cost of work-in-process at January 31 was P3,600. This cost was determined through the production report and is composed of the following elements: Direct materials P 1,500 Direct labor 1,200 Overhead 900 In addition, assume that finished goods inventory at January 31 was P6,500, consisting of: Direct materials P 1,500 Direct labor 2,850 Overhead 2,150 The journal entries under JIT costing are shown below. 1. Raw and in Process - 4,000 Accounts Payable 4,000 To record product costs 2. Cost of goods sold 18,200 Wages payable 10,400 Factory Overhead Control 7,800 To record product costs 3. Finished goods 2,500 Raw and in Process 2,500 To record transfer of cost of units completedCost Accounting 168 Materials received re Less: Mat. In RIP ‘Amount to be backflushed 1,000 4. Cost of goods sold 1,000 Finished goods To record transfer of units sold Materials cost of units comp 2,500 Less: Mat. in FG end 1,500 Amount to be backflushed 1,000 5. Raw and in Process 2,100 Finished goods. 50M 99 Cost of goods sold a To adjust cost of goods sold For Raw and In Process: Labor cost - raw and in process 1,200 Overhead - raw and in process 900 Total to be adjusted 2,100 For Finished goods Labor cost - finished goods 2,850 Overhead - finished goods 2,150 Total to be adjusted 5,000 Backflushing Backflushing is also known as backflush costing or backflush accounting. It is 2 shortened version of the traditional method of accountin, h costing and process costing numerous subsidiary record. at est, ‘Under job _ process are maintained and these records are updated by man: of the work in Under JIT system, where the time from the receipt of aaaaainiaie entries. completion of product is reduced to a few hours, the useful materials ft the cost of the WIP becomes impractical ness of tracking theChapter 6 Just in Time and Backflush Accounting 169 ‘The purpose of backflush costing is to simplify and to reduce the number of events 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 peri is si gre not maintained of units in process, period. Detained subsidiary records 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.170 Cost Accounting TRUE OR FALSE For each [ the blank to indicate of the following statements, enter a T OF and F whether the statement is true or false. 1. One purpose of a JIT inventory system is to have goods ready just when the customer needs them. 2. Under JIT, materials are “pushed” to ensure timely completion of finished pr 3. A company will typically have fewer supp) conventional system. from one workstation to another ‘oducts. liers under JIT than a lar pieces of equipment (such 4. For JIT to operate successfully, all simi as lathers or drill presses) must be grouped together, 5. One-way to reduce inventories is to reduce the setup time needed between production runs. 6. The most effective way to achieve total quality control is to have an Inspection Department that inspects all incoming raw materials, and inspects goods as they move along the product flow line. 7. In a JIT environment, workers are expected to be cross-trained and work as a team. 8. Under JIT, process time and queue time would both be considered value-added activities. 9. The time involved in changing equipment and getting jigs and forms in place to accommodate the production of a different item is known as the setup time. 10. The workforce under JIT has less responsibil , ‘ " sponsibility fc 1 than in a conventional production system. ity for quality controlChapter 6 Just in Time and Backflush Accounting 171 problems —e__—_—_—_—_—__ Problem 1 Sa ry oats has a cycle time of less than a day, uses a Raw and In Pind of each. and expenses all conversion costs to Cost of Goods Sold. At month, ‘all inventories are counted; their conversion cost components are estimated and inventory account balances are adjusted accordingly. Raw material is backflushed ft ini following information is for the month of Aug from RIP to Finished Goods. The RIP beginning, including P 25,560 of conversion cost P ginning, includ . 42,600 FG beginning, including P 27,000 of conversion cost 45,000 Raw materials purchased on credit 356,000 RIP end, including P 13,500 of conversion cost estimate 22,500 FG end, including P 9,600 of conversion cost estimate 16,000 Direct labor — P 350,000; factory overhead - P 196,150,000 Required: ' Prepare all journal entries that involve the RIP account and/or finished goods account. Problem 2 The Magnolia Corporation has a cycle time of 1.5 days, uses a raw and in process 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 materials cost is backflushed from raw and in process account to finished goods. The following information is for July. Beginning balance of RIP account, including P14,040 of conversion cost P 23,400 Beginning balance of finished goods account, including P14,400 of. conversion cost 24,000 Raw materials received on credit 444,000 Ending RIP inventory per physical count, including P15,360 conversion cost estimate . 25,600 Ending FG inventory per physical count, including P11,400 conversion cost estimate . 19,000 Conversion cost (direct labor — 210,000; factory overhead — PI 89,000) Required: Journal entries to record the given transactionsCost Accounting 172 Problem 3 «8 of 3.0 days, uses & Raw and The Smart Manufacturing Company has cycle aC ‘ost of Goods Sold. At the In Process account and charges all conversion oe conversion cost components end of each month, all inventories are counted, the osted Raw material cost is are estimated and inventory account balances are adjusie®” = tion is for the backflushed from RIP to Finished Goods. , The following 1”! month of June. P 146,000 Materials purchased on credit 15,000 RIP beginning, including P4,400 of conversion costs 36,000 FG beginning, including P10,800 of conversion costs 34°00 RIP end, including P 7,800 of conversion costs 18,000 FG end, including P 6,500 of conversion costs ° Conversion cost — P 80,000 direct labor and P) 00,000 overhead juirements ie flushed from RIP to Finished Goods 1. Compute for the amount of materials bac! 7 2. Compute for amount of materials backflushed from Fini 3. Journal entries to record the above transactions ished Goods to CofGS. Problem 4 The Chiz Manufacturing Company has a cycle time of 2.0 days, uses a Raw and In Process account (RIP) 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 materials cost is backflushed from RIP to Finished Goods. The following is for the month of May. RIP beginning, including P12,000 of conversion cost P 40,000 FG beginning, including P 8,800 of conversion cost 35,000 Raw materials purchased on credit 230,000 RIP end, including P 15,700 of conversion cost 38°50 FG end, including P 13,100 of conversion cost 58300 Conversion cost — P 180,000 of direct labor and P 225,000 of overhead e Requirements: 1, Amount of materials backflushed from RIP to Finished Goods 2, Amount of materials backflushed from Finished Goods t 3. Journal entries to record the given transactions © Cost of Goods Sold.r Wee CHAPTER 7 a ACCOUNTING FOR MATERIALS LEARNING OBJECTIVES Upon completion of this chapter, you should be able to: . Distinguish between and account for direct and indirect materials as they are used in the production process. Differentiate among the forms used in the purchase and issuance of materials such as purchase tequisition, a purchase order, a receiving report, and a materials requisition. Distinguish between the periodic and perpetual cost accumulation systems used to account for materials issued to production and for ending materials inventory. Distinguish among the five common control procedures used to assist management is keeping inventory costs to a minimum. SYSTEMS OF ACCOUNTING FOR MATERIALS ISSUED TO PRODUCTION AND ENDING MATERIALS INVENTORY Either the periodic inventory system or the perpetual inventory system may be used to account for materials issued to production and ending materials inventory. ACCOUNTING BY THE PERIODIC INVENTORY SYSTEM Under a periodic inventory system, ‘the purchase of direct and indirect materials is recorded in an account entitled “Purchases”. If a beginning materials inventory exists, it is recorded in a separate account entitled “Materials Inventory - Beginning”. Purchases added to the materials inventory — beginning will be equal to materials available for use. Ending materials inventory is determined by a physical count of the materials on hand at the end of the period. Cost of materials issued is determined by deducting from the materials available for use the materials inventory — end. Note that under this method the cost of materials issued is not directly determined; it is indirectly computed by deducting the remaining inventory on hand from the total available for use. ACCOUNTING BY THE PERPETURAL INVENTORY SYSTEM Under a perpetual inventory system, the purchase of direct and indirect materials is Tecorded in an account entitled “ Materials Inventory” rather than in a purchase174 Cost Accounting f the materials invento, 7 oanueds the Materials Inventory ith a corresponding debit to the rials is debited to the facto; tory system, both the Cost of be directly ascertained after account. The beginning materials inventory is t at the end of the previous period. When material account is credited for the cost of direct materials ! work in process inventory. Issuance of indirect mate overhead control account. Under the perpetual inven materials issued and the ending materials inventory ca each transaction. CONTROL PROCEDURES It is of utmost importance that a company has a good system of dance and ae control. Achievement of good control keeps costs at & minimum eve! fl plant production on a smooth, uninterrupted schedule. The following concepts should be employed in an inventory control system. nd parts. It is also the result of Is to produce finished . Inventory is the result of purchasing raw materials a1 rt applying labor and factory overhead to the raw material goods. 7 2. Reduction of inventory is the result of normal use and also finding alternative uses for scrapping unneeded items. . Optimum inventory investment is based on quantitative techniques; which are designed to minimize the cost of carrying inventory and the cost of ordering inventory. Efficient purchasing, management, and investment in materials depend on an accurate forecast of sales and resulting production schedules. . Forecasts-help determine when to order materials. Controlling inventory can be accomplished by scheduling production. Inventory control is more than maintaining inventory records. Control is exercised by people who are making personal judgments partially on the basis of past experiences but within the general framework of organizational objectives and policies to achieve them. esvential to production will tend te have their neces prerials, cue miateriel frequently despite the cost and effort of doing st by exneres ne reviewed more : ig So by experienced personnel w vos a HH The total cost of a finished product is composed of the am direct labor and share in the factory overhead, adopt a cost control system for each element. Th cost control system is to keep expenditures within ; nount spent for materials, It becomes necessary therefore 10 € major function, in general, of any the limits providedChapter 7 Accounting for Materials 175 conceives by & ie tee ee The Control should also encourage cost reductions: by elimins Perational inefficiencies. An effective system of cost control is designed to control the people responsible for the expenditures because people control costs, costs do not contro! themselves, COMMONLY USED CONTROL PROCEDURES }. Order cycling . 2, Min-max method 3, Two-bin method 4, Automatic order system 5, ABC plan Order cycling - method where materials on hand are reviewed on a regular or periodic cycle, like let’s say every 30 days. The cycle length will differ according to the type of material being reviewed, Essential or important materials will have a shorter review cycle than less important items. At the time of the review, an order will be placed to bring the inventory to a desired level. A technique often used for small items is the 90-60-30 day method. When the inventory level drops to a 60-day supply, an order will be placed for a 30-day supply. z Min-max method — this method is based on the assumption that materials inventory have minimum and maximum levels. Once the specific minimum and maximum quantities are determined, the minimum quantity will represent the order point. When the inventory reaches the minimum level, an order is placed to increase the inventory to the maximum level Minimum quantities are usually determined to protect the company against stockout. Two-bin method — this method is used for materials that are considered inexpensive and/or nonessential. The advantage of this method is that it is simple and requires only a minimum of clerical time. Under this materials are divided and placed into two separate bins. The quantity of materials that will be used between the time an order is received and the next order is placed will be on the first bin. The second bin will contain the quantity of materials that will be used between the ordering and delivery, plus additional units of safety stock. When the first bin is emptied, an order is placed. The contents of the second bin will be used until the receipt of the shipment, Automatic order system — this method is used by most companies that are computerized. An order is automatically placed when the level of inventory reaches a + predetermined order point quantity. Perpetual inventory record cards are maintained