Junior Philippine Institute of Accountants and Auditors – United
Cost Accounting and Control
OVERVIEW
1. Just In Time and Backflush Accounting
2. Process Costing
3. Average and FIFO Costing
INTRODUCTION TO JUST-IN-TIME AND
BACKFLUSH ACCOUNTING
Just-in-time
• Means that raw materials are received just
in time to go into production
• Manufactured parts are completed just in
time to be assembled into products
• Products are completed just in time to be
shipped to customers
• Calls also for the transfer of finished goods
directly to the vehicles used to deliver
them to customers, rather than to storage
Just-in-time manufacturing
• Characterized by decisions made by
companies to intentionally maintain
relatively small inventory levels
Characteristic of just-in-time costing
• Production costs are accumulated with
inventory at later stages of the production
process
• JIT assumes that small (if any) quantities
of direct materials, work-in-process, and
finished goods inventories will be
maintain
o labor and overhead are normally
accumulated directly in cost of
goods sold account. At the end of
the period, the labor and overhead
costs associated with any unsold or
uncompleted items are “backed
out” and included in either goods or
work-in-process, respectively.
o JIT costing is often referred to as
backflush costing.
5 key elements involved in the operation of a JIT
system
1. A company must learn to rely on a few
suppliers who are willing to make
frequent (even daily) deliveries in small
lots.
2. A company must improve its product flow
lines by creating an individual flow line for
each separate product.
3. A company must reduce the setup time
between production runs.
o Automation is another way which
is Flexible Manufacturing System
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(FMS), it is just one part of the
overall concept of computer-
integrated manufacturing.
4. A company must develop a system of total
quality control (TQC) over its parts and
materials.
o In the absence of TQC, it would be
impossible to successfully
implement a JIT system.
5. A company must develop a flexible work
force.
Just-in-time costing
• Differs from traditional costing with
regards to the accounts used and the
timing of the cost recording.
Just-in-time costing 3 major differences
1. Instead of using separate accounts for
Material and Work in Process as in
tradition costing JIT costing combines
these into a Raw and in Process account.
2. Direct labor is usually considered a minor
cost time in a JIT setting so no separate
account for direct labor is created.
3. In traditional costing overhead is applied
to products as they are being produced
and is recorded into the Work in Process
account. In JIT costing, overhead is not
applied to production until they are
completed. When products are completed
under JIT costing, labor and overhead is
added to Cost of Goods Sold, since the
goods are sold soon after production is
completed.
Backflushing
• Also known as backflush costing or
backflush accounting.
• Shortened version of the traditional
method of accounting for cost.
• Under JIT system, where the time from the
receipt of the materials to the completion
of production is reduced to a few hours,
the usefulness of tracking the cost of the
WIP becomes impractical.
Purpose of backflush costing
• Simplify and reduce the number of events
that are measured and recorded in the
accounting system.
• The inventories are not adjusted during
the accounting period to reflect the
different production costs, instead
 Junior Philippine Institute of Accountants and Auditors – United
Cost Accounting and Control
adjustments are made at the end of the
period.
• Eliminates some of the accounting steps
under traditional costing and some of the
general ledger accounts are combined into
one.
• Some or all elements of the cost of output
are determined only after the production
is completed.
INTRODUCTION TO PROCESS ACCOUNTING
Basic purpose of cost accounting
• Is the accumulation of data designed to
provide management with accurate
information on the cost of manufacturing a
product.
• When a manufacturing process involves
the continuous production of identical
units rather than distinguishable job lots,
there can be job orientation. When there is
no obvious start or finish, we use a
process-costing to accumulate and
allocate manufacturing costs.
• At the end of each period, the costs
accumulated on each such report will be
allocated between end-of-period work in
process and units transferred to the next
process, or, in the case of the final process,
to finished goods.
Process cost system
• Determines how manufacturing costs
incurred during each period will be
allocated.
• The allocation of costs within a
department is only an information step,
the ultimate goal is to compute total cost
per unit for income determination.
• During a period, some units will be started
but will not be completed by the end of the
period. Consequently, each department
must determine how much of the total
costs incurred by the department is
distributed to units still in process and
how much is attributable to completed
units.
Process costing methods are used by the
following:
1. Industries producing chemicals,
petroleum, textiles, steel, rubber, cement,
flour, pharmaceuticals, shoes, plastics,
sugar, and coal.
2. Firms manufacturing items such as rivets,
screws, bolts, and small electrical parts.
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3. Assembly type industry which
manufactures typewriters, automobiles,
airplanes, and household electric
appliances.
4. Service Industries such as gas, water, and
heat.
Characteristics of a process cost system
1. Costs are accumulated by the department
or cost center.
2. Each department has its own general
ledger Work in Progress Inventory
account. This account is debited with the
processing costs incurred by the
department and credited with the cost of
completed units transferred to another
department or to finished goods
inventory.
3. Equivalent units are used to restate - work
in process inventory to terms of completed
units at the end of a period.
4. Completed units and their corresponding
costs are transferred to the last
department or to finished goods
inventory. By the time units leave the last
processing department, total cost for the
period have been accumulated and can be
used to determine the unit cost of each and
total finished goods.
5. Total costs and unit costs for each
department are periodically calculated
and analyzed with the use of department
cost of production report.
Comparison of Job Order Costing and Process
Costing
• A job order cost accumulation system is
most suitable when a single production of
a batch or products is manufactured
according to a customer’s specification.
Process Cost Accumulation System
• It is used when products are manufactured
by either mass production techniques or
continuous processing.
Process costing
• It is suitable when homogeneous products
are manufactured in large volume.
• Individual work in process inventory
subsidiary cost sheets are set up for each
and are changed with the cost incurred in
the production of the specifically ordered
units.
 Junior Philippine Institute of Accountants and Auditors – United
Cost Accounting and Control
• Under a process system, the three basic department accompanied by their
elements of a product’s cost are corresponding costs.
accumulated according to department or • Thus, the output of Department 1 becomes
cost center the input of Department 2. Department 2
• There are four major differences between receives both the units produced by
process costing and job order costing. Both Department 1 and the costs carried by
require accumulating the costs of goods such units.
and services. • When the Department 2 completes its
processing, it transfers out the units and
Job Costing the costs it received from Department 1
plus any cost it incurred while working on
the units.
• The costs of a unit grow larger as it
progresses along the assembly line from
Job 101

Materials Labor
one department to the next.
Job 102 FGoods CofGS
Factory OH • Generally, the cost per unit increases as
units flow through each department. The
Job 103
unit cost can decrease when units pass
through a department if volume is added
to the product.
Work in Process Finished Goods Cost of Goods Sold System Flow
xxx xxx xxx xxx xxx xxx
• Units and costs flow together through a
Process Costing process cost system.
Units to account Units accounted
for for
Beginning units Units completed
in process & transferred
Process A
+ +
Units started in Units completed
Materials Labor
Factory OH
Process B process or = and on hand
received from
previous dept.
Process C FGoods CofGS
+ +
Increase in units Units in process
due addition of end
Materials
WP- WP- WP- Finished C of GS
Dept. A Dept.B Dept.C Goods Production Flow
xx xx xx xx xx xx xx xx xx xx
• A product can flow through a factory in
three different ways.
Process system
o Product flow formats:
• The product may flow through several
1. Sequential product flow
operations on its way to completion.
Materials may be started in Dept A. • The initial raw materials are placed into
• Both units and costs will be identified for
process in the first department and flow
Dept. A over a period of time, such as a through every department in the factory.
month.
• When Dept. A completed, the units with
their costs are transferred to the next
operation, Dept. B.

Production by Department
• In a process cost system, when units are
completed in one department, they are
transferred to the next processing

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 Junior Philippine Institute of Accountants and Auditors – United
Cost Accounting and Control
2. Parallel product flow 1. Direct Materials
• Certain portions of the work are done at • Always added in the first processing
the same time and then brought together department, but they are also usually
for the final process and upon completion added in other departments.
transferred to finished goods inventory. • Much simpler in a process cost system
than in job order cost system
• The number of departments using direct
materials is usually less than the number
of jobs requiring direct materials in a job
order cost accumulation system.

Work in Process – Departmenr 1 xxxx

Materials xxxx

2. Direct Labor
• The amounts to be charged to each
department are determined by the gross
earnings of the employees assigned to
each department.
3. Selective • Process costing reduces the amount of
• The product moves to different paperwork needed to assign labor costs.
departments within the factory,
depending upon the desired final product. Work in process – Department 1 xxxxx
Several products are produced from the Work in process – Department 2 xxxxx
same initial raw materials. Work in process – Department 3 xxxxx
Payroll xxxxx

Factory Overhead
• Maybe applied using either of the
following two methods.
• Either method may be used if production
is continuous
o First method
- Similar to that used in job
order costing, applied
factory overhead to work-
in-process inventory at a
Procedures (direct materials, direct labor, and predetermined application
factory overhead) rate.
o Predetermined factory overhead
• The use of a process cost system does not
application rate based on normal
alter the manner of accumulating direct
capacity
materials, direct labor and factory
- Is appropriate when
overhead costs.
production volume or
• The normal procedures of cost accounting
factory overhead costs
are used to accumulate the three product
fluctuate substantially from
cost elements.
month to month, as it
o Process costing
eliminates distortion in
- Concerned however with
monthly unit costs caused
the assignment of these
by such fluctuations.
costs to appropriate
o Second method
departmental Work in
- Charges actual factory costs
Process Inventory account.
incurred to work in process
inventory.
3 product cost elements

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 Junior Philippine Institute of Accountants and Auditors – United
Cost Accounting and Control
- Production volume and
factory overhead costs
remain relatively constant
from month to month,
expected capacity is
appropriate as the
denominator activity level.
Work in process inventory – Department 1 xxx
Work in process inventory – Department 2 xxx
Work in process inventory – Department 3 xxx
Factory overhead applied
The cost of production report
• The cost of production report is an
analysis of the activity in the department
or cost center for the period. All costs
chargeable to a department or cost center
are presented according to cost elements.
• There are a number of useful formats in
preparing the cost of production report.
a. Step 1 – The Quantity Schedule
• This schedule accounts for the physical
flow of units and out of departments. All
units started in the department must be
accounted for and also the disposition of
these units, that is, whether they are
transferred to the next department
(complete or incomplete). This schedule is
concerned only with whole units,
regardless of their stages of completion.
b. Step 2 – Calculate Equivalent Units and
unit costs
• The concept of equivalent production is
basic to process costing. In most cases, not
all units are completed during the period.
All units must be expressed in terms of
completed units in order to determine unit
costs. Completed units do not create a
problem when equivalent production is
computed because they are always 100%
complete as to direct materials, direct
labor, and factory overhead.
First-in First-out Method
Equivalent unit cost = Cost added during the
period
Equivalent units (work
done this period
Weighted Average Method
Equivalent unit cost = (Cost last period plus cost
added this period)
Equivalent units (work
done last period plus
work done this period)
c. Step 3 – Determine the costs to be
accounted for
• Responsible for may come from several
sources.
• There may be some units in beginning
inventory that maybe partially complete;
and the costs of direct materials, direct
xxx
labor, and factory overhead that were
assigned to these units last period will
become the cost of the beginning
inventory and must be accounted for
• If the department is not the first
department in the production process, it
will receive costs from the other
departments when the units from these
departments are received in its
operations.
d. Step 4 – Account for all costs
• Where costs of disposition of the accounts
were made.
• Some of the costs are assigned to cost
centers receiving units transferred out of
the department.
• The remaining costs are assigned to the
units remaining in the department and, in
some cases, to any unit lost.
Methods of application of elements of cost to
production
1. Even application
• It is considered that at any stage
during the process of production,
the introduction of the three
elements of cost are equal with one
another.
• Only one computation of equivalent
production should be made.
2. Uneven application
• the introduction of the elements of
cost to production varies at any
stage of the process, hence, there
should be as many computations of
equivalent as the elements of cost
that are unevenly applied.
INTRODUCTION TO AVERAGE AND FIFO
COSTING
Difference of Average and FIFO method
• Under the weighted average method
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 Junior Philippine Institute of Accountants and Auditors – United
Cost Accounting and Control
- No distinction is made between
completed units from beginning
work in process and completed
units from the current period.
• Under the fifo method
- Units in the beginning work in
process inventory are reported
separately from units of the current
period.
Methods of costing under process costing
1. FIFO Method
• There is an assumed flow of
manufacturing operations and as
such it is considered that those
units which are first placed into
process are presumed to be the
first ones completed are the ones
transferred out.
o Characteristics
1. The work in process
beginning in the department
will require separate
computations for its
equivalent production.
2. The units started,
completed and transferred
will have its own
computation for the
equivalent production.
2. Average Method
• There is no assumed flow of
manufacturing operation.
• Involves the merging of the
departmental costs, by elements, of
the initial work in process inventory
with the costs incurred in the current
month
• Securing a representative average
unit cost by dividing the total element
of costs by the equivalent production
based upon the sum of units in the
initial work in process inventory and
the units placed into production
during the period.
o Characteristics
1. The stage of completion of
the work in process beginning
is ignored and the total units
completed and transferred
during the period is
considered to have 100%
completion.
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Difference between FIFO and Average
A. Computation of equivalent production:
1. FIFO
- Work done last month on the units
in process, beginning is considered.
2. Average
- Work done last month on the units
in process, beginning is ignored
and not considered
B. Computation of unit cost
FIFO = Current period costs
Equivalent units of current work done
Average = Costs in beg. Inv. + Current period cost
Equivalent units in beg. Inv. + Equivalent
units of current work done
C. Computation of the cost of goods
transferred out and the cost of ending
inventory
1. The costs already in the beginning
inventory at the beginning of the
period.
2. The current period costs to complete
beginning inventory, which equals the
equivalent units to complete beginning
inventory time the current period unit
cost computed for FIFO.
3. The costs to start and complete units,
calculated by multiplying the number
times the current unit cost computed.
o Using FIFO, the cost of goods in
ending inventory equals the
equivalent units in ending
inventory timed the unit current
cost.
o Using weighted average, the cost of
goods transferred out equals the
total units transferred
o Using the weighted average, the
cost of goods in ending inventory
equals the equivalent units in
ending inventory times the
weighted average unit cost.
Steps for assigning process costs to units
1. Summarize the flow of physical units.
2. Compute the equivalent units produced.
o Using FIFO, this means adding the
equivalent units of work done to”
a. Complete units in beginning
inventory
b. Start and complete units
 Junior Philippine Institute of Accountants and Auditors – United
Cost Accounting and Control
c. Work on units stull in ending
inventory
- Using weighted average, this
means adding the equivalent
units of work done in the
current period to the
equivalent units of work
already done in the beginning
inventory from the previous
period.
3. Summarize the total costs to be accounted
for.
o The total costs to be accounted for
are the costs in the beginning work
in process inventory and current
period costs.
4. Compute costs per equivalent unit.

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