CHAPTER 12

JUST IN TIME SYSTEM AND BACKFLUSH COSTING

JUST IN TIME SYSTEMS BACKFLUSH COSTING

Just in time (JIT) manufacturing is a production Backflush costing is a costing system that omits
system in which each component in a production recording some or all of the journal entries
line is produced immediately as needed by the relating to the following cycle:
next step in the production line. The aim of JIT
systems is to produce the required items, of high
quality, exactly in the time they are required. JIT
systems are characterized by:

❖ a move towards zero inventory

❖ elimination of non-value added activities
❖ an emphasis on perfect quality, i.e., zero
defects
❖ 100% time deliveries
❖ Demand-pull manufacture

It is the latter characteristic which gives rise to
the name of Just in Time. Production only takes
place when there is actual customer demand for
the product so JIT works on a pull-through basis
which means that products are not made to go
into stock. JIT systems result in reduction in
inventories so that inventory valuation becomes
less relevant. Simplified accounting procedures
can be used for allocating costs between cost of
sales and inventories. This simplified
procedure is known as backflush costing.
When journal entries for one or more
stages in the cycle are omitted, the journal
entries for subsequent stage use 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.
Actual conversion costs are recorded as
incurred, just the same as conventional
recording systems. Conversion costs are then
applied to product at various 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.

The following three methods illustrates backflush accounting. The three methods differ in the number
of trigger points at which journal entries are made in the accounting system.

Method 1 Method 2 Method 3

1. Purchase of Raw 1. Purchase of Raw
Trigger Materials Materials
Points 2. Completion of Finished 1. Completion of Finished
Goods Goods
3. Sale of Finished Goods 2. Sale of Finished Goods 2. Sale of Finished Goods
Inventory 1. Raw and In Process (RIP) 1. Raw and In Process (RIP)
Account Account Account
2. Finished Goods Account 1. Finished Goods Account
1. Three trigger points 1. Two trigger points 1. Simplest of all
Main 2. Use of combined raw 2. Use of combined raw 2. Two trigger points
Features materials and in process materials and in process
account account
3. No finished goods
account
In all three methods, there are no journal entries in the accounting system for work in process
(stage 2). These three methods are usually used where the amounts of work in process are small.
 CHAPTER 13
JOINT AND BY-PRODUCT COSTING
JOINT PROCESS
The joint process is a manufacturing process
that simultaneously produces more than one
product line.
The split-off point is the point at which the
outputs of a joint process are first identifiable or
can be separated as individual products.
A joint cost includes the costs incurred, up to the
split-off point, for material, labor, and overhead
during a joint process. Costs incurred after split-
off are assigned to the separate products for
which those costs are incurred. The joint cost is
allocated, at the split-off point to the primary
output of the production process.
Outputs of a Joint Process:
❖ Joint products - primary outputs of a joint
process; substantial revenue-
generating ability
❖ By-products - incidental output of a joint
process with a higher sales value than
scrap but less than joint products
❖ Scrap - incidental output of a joint
process with a low sales value
❖ Waste - residual output with no sales
value
ALLOCATION OF JOINT COSTS
PHYSICAL MEASURE ALLOCATION
o Treats each unit as equally desirable
o Assigns same cost to each unit
o Provides an unchanging yardstick of output
over time
o Use for products with unstable selling prices
o Ignores revenue-generating ability of joint
product
ALLOCATION OF JOINT COSTS
MONETARY MEASURE ALLOCATION
o Sales Value at Split-off
▪ Uses relative sales value at split-off point
▪ All joint products must be marketable at split
off
▪ Uses a weighting technique based on both:
• Quantity produced
• Selling price of production
o Net Realizable Value (NRV) at Split-off
▪ Assigns joint costs based on the
proportional net realizable values of the
joint products at the split-off point
▪ All joint products must be marketable at
split-off
Formula:
Sales Revenue at Split-Off
Less: Product Disposal Costs
Net Realizable Value
o Approximated NRV at Split-off
▪ Some or all joint products are not
marketable at split-off
▪ Uses simulated net realizable value at split-
off in place of actual net realizable value at
split-off
▪ Assumes that incremental revenue from
further processing is equal to or greater
than the incremental costs of further
processing and selling
Formula:
Final Sales Price
Less: Incremental Separate Costs
Simulated Net Realizable Value at Split-off
Additional Notes: Incremental separate cost
equals all processing and disposal costs
incurred between split-of point and point of
sale.
 ACCOUNTING FOR BY-PRODUCTS AND SCRAP
Sales value of by-products/scrap is recorded using:
1. Net Realizable Value
❖ Use this method when net realizable
value is significant
❖ Scrap or by-product recorded at net
realizable value
❖ Net realizable value reduces joint cost
of main products
❖ Any loss is added to cost of the main
products
INDIRECT METHOD
Joint cost is reduced when the by-
product/scrap is SOLD
Net realizable value reduces cost of goods
sold for joint products
DIRECT METHOD
Joint cost is reduced when by-
product/scrap is PRODUCED
Net realizable value reduces work in
process for joint products
2. Realized Value - by-product/scrap
value is recognized when items are SOLD
FIRST OPTION
❖ Proceeds recorded as Other Revenue
❖ Costs of additional processing or
disposal added to costs of primary
products
❖ Provides little information to
management as it does not match
revenues and expenses
SECOND OPTION
❖ Proceeds less related costs are shown
as Other Income
❖ Matches revenues and related
expenses for storage, further
processing, transportation, and
disposal costs
❖ Highlights the revenue enhancement
provided by managing the costs and
revenues related to by-products/scrap
❖ Allows for better control and improved
performance
OTHER OPTION (clerically efficient)
❖ Proceeds added to gross margin
❖ Proceeds reduce cost of goods
manufactured
❖ Proceeds reduce cost of goods sold