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JIT & Backflush Costing
JIT & Backflush Costing
→ 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.
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.
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
Backflush entries:
FG 498,250
RIP 498,250
COGS 495,250
FG 495,250
RM-COGM 498,250
RM-FG, beg 60,000
RM-FG, end (63,000)
RM-COGS 495,250
RIP 3,250
FG 27,000
COGS 30,250
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:
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
Backflush entries:
COGS 200
RIP (850 – 600) 250
FG (2,000 – 1,550) 450
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 costingc. Activity-based costing d. Job order costing
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:
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 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