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JUST IN TIME AND BACKFLUSH COSTING With Illustrative Problem
JUST IN TIME AND BACKFLUSH COSTING With Illustrative Problem
Back flush costing-is a simplified cost accumulation method of accounting the cost to produce goods
or services which are often used by companies that have adopted just in time (JIT) production
system.
JIT system was first used by Ford Motor Company during 1920s, but it was subsequently adopted
and publicized by Toyota Motor Corporation of Japan as part of its system. In 1954, Toyota Motor
Corporation successfully implemented this system in order to minimize overstocking in car
production.
The Back flush Costing method accounts the company’s inventories backward by calculating the cost
of products after they are sold, finished or shipped to customers rather than accounting it before
and during the production process. With this approach it delays the costing process until the
production of goods or services is completed. Standard costs are used to assign costs to units to
record the transactions and then flush costs backward to determine the remaining inventory. The
result is that the detailed tracking of costs is eliminated. The difference between the actual cost and
standard cost will be accounted as variance which will be charged to cost of goods sold account.
Traditional costing system records the costs of inventories from raw materials, purchases, work in
process, to finished goods and when it is sold. Back flush costing avoids following the usual
movement of inventories through the manufacturing process. It is best suited to a company that
have adopted just in time philosophy and it is used where the overall cycle time is relatively short
and the inventory levels are low.
Back flush costing has only two categories of costs, the materials and conversion costs. Its unique
feature is that there is no work in process account. The company uses trigger points to account for
its inventories. Trigger point refers to a stage in cycle going from the purchase of raw materials to
the sale of finished goods at which journal entries are made in the accounting cycle.
There are different methods of applying back flush costing. These methods differ in the number and
placement of trigger points at which journal entries are made in the accounting system.
Method No. of Journal Entries (Trigger Points) Location in cycle where the JE Made
Sample Problem:
1. Peter Senen manufactures a product known as “Sweet Melody Lotion”. The transactions for the
month of March 2022 were as follows:
Purchase of raw materials P1,000,000
Labor/Wages incurred 300,000
Factory overhead incurred 400,000
Units completed 50,000 units
Units sold 49,900 units
There are no beginning inventories of raw materials, work in process and finished goods. The
standard cost per unit of output is P34.80 (P19.80 for raw materials and P15 for conversion costs, of
which P6 is for labor cost.
Solutions
7. COGS 1,736,520
Finished Goods 1,736,520
(49,900 X P34.80)
4. COGS 1,736,520
Finished Goods 1,736,520
CC 700,000
Accrued payroll 300,000
Various 400,000
CC 700,000
Accrued Payroll 300,000
Various 400,000
2. COGS 1,736,520
Finished Goods 1,736,520
CC 700,000
Accrued Payroll 300,000
Various 400,000
The ledger accounts in respect of the above transactions show the following:
2.The Peter Senen Manufacturing Company uses a raw and in process (RIP) inventory account and
expenses all conversion costs to the cost of goods sold account. At the end of each month, all
inventories are counte, their conversion cost components are estimated, and inventory account
balances are adjusted accordingly. Raw materials cost is back flushed from RIP to Finished Goods.
The following information is for the month of April:
Required:
Compute the amount to be back flushed from RIP to finished goods.
Solution:
Beginning balance of RIP account (P31, 000-P1,400) P29,600
Add: Raw materials received on credit 367,000
Total P396,600
Less: Ending balance of RIP inventory per physical
Count (P33,000-1,800) 31,200
Amount to be back-flushed P365,400
3. The JYD Manufacturing Company produces only for customer order and most work is
shipped within thirty-six hours of the receipt of an order,. JYD uses a raw and in process (RIP)
inventory account and expenses all conversion costs to the cost of goods sold account. Work is
shipped immediately upon completion, so there is no finished goods account. At the end of each
month, inventory is counted, its conversion cost component is estimated, and the RIP account
balance is adjusted accordingly. Raw material cost is back flushed from RIP to Cost of goods sold. The
following information is for the month of May.
Beginning balance of RIP account, including P1,300 of conversion cost P12,300
Raw materials received on credit 246,,000
Ending RIP inventory per physical count, including P2,100 conversion cost estimate 12,100
Required:
Compute the amount to be back flushed from RIP to Cost of Goods Sold
Solution:
4. Using the data in No. 3, compute the amount of Cost of Goods Sold after all transactions
and adjustments are made.
Solution:
Cost of goods sold P247,000
Less; adjustments in conversion cost
(2,100-1,300) 800
Adjusted COGS P246,200
5. Petesy, general manager of Peter Senen Corporation, has provided the following
information for transactions that occurred during March. The Corporation uses a JIT costing system.
Solution:
Actual Factory Overhead P225,000
Direct Labor Costs incurred 77,000
Total actual conversion costs P302,000
Less; Applied Conversion costs to production 300,000
March 31 Conversion Cost balance-debit U P 2,000
6. Using the same information in No. 5, compute the March 31, balance in the Finished
goods
account.
Solution:
7. Ethel, owner of Ethel Corporation, has provided the following information for transactions that
occurred during August. The Corporation uses a JIT costing system.
Solution:
Raw materials purchased were requisitioned
For production P950,000
8. Using the same information in No. 7, compute the amount of Finished Goods after all transactions
have been completed.
Solution:
Amount to be back flushed from RIP to Finished Goods P950,000
Applied conversion costs to production 8,100,000
Amount of Finished Goods P9,050,000