COST ACCOUNTING AND CONTROL – Solutions Manual

CHAPTER 8
OPERATION COSTING, JUST-IN-TIME SYSTEM AND BACKFLUSH
COSTING

I. Answers to Questions

1. No. This statement reverses the appropriate sequence, production system

developments typically precede costing system developments and not vice versa.
2. Industries likely to use operation costing include automotive, processed
vegetables, and clothing manufacturing.
3. a. the major job-costing feature of operation costing is the specific
assignment of direct materials costs to individual work orders.
b. the major process-costing feature is that within each operation all
product units are treated exactly alike, assessed as using identical
amounts of the operation’s resources.
4. JIT production systems simplify job coting because direct materials are rapidly
converted to finished goods that are immediately sold. The absence of
inventories means that cost-flow assumptions (e.g., weighted-average or first-in,
first0iut) or inventory costing methods (absorption or variable costing) are
unimportant. When inventories are low, managers may not find it worthwhile to
spend resources tracking costs through Work in Process, Finished Goods and
Cost of Goods Sold. Job-costing systems can be simplified using backflush
costing.
5. A demand-pull system (like a just-in-time production system) is one in which
demand triggers each step of the production process, starting with customer
demand for a finished product at one end of the process and working all the way
back to the demand for direct materials at the other end of the process. Demand
pulls a product through the production line. A push-through system, often
described as a materials requirement planning (MRP) system, uses (a) demand
forecasts for a final products; (b) a bill of materials outlining the materials,
components and subassemblies for each final product; and (c) the quantities of
materials, components, subassemblies and product inventories to predetermine
the necessary outputs at each stage of production.
6. There are five main features in a JIT production system:
1. Production is organized in manufacturing cells, a grouping of all the
different types of equipment used to manufacture a given product.
2. Workers are trained to be multiskilled so that they are capable of performing
a variety of operations and tasks.

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 3. Total quality management is aggressively pursued to eliminate defects.
4. Emphasis is placed on reducing setup time, which is the time required to get
equipment, tools and materials ready to start the production of a component
or product, and manufacturing lead time, which is the time from when an
order is ready to start on the production line to when it becomes a finished
good.
5. Suppliers are carefully selected to obtain delivery of quality-tested parts in a
timely manner.
7. The financial benefits of implementing a JIT system are:
1. Lower investment in inventories.
2. Reductions in carrying and handling costs of inventories.
3. Reductions in risk of obsolescence of inventories.
4. Lower investment in plant space for inventories and production.
5. Reductions in setup costs and total manufacturing costs.
6. Reduction in costs of waste and spoilage as a result improves quality.
7. Higher revenues as a result of responding faster to customers.
8. Reductions in paperwork.
8. Just-in-time systems facilitate the direct tracing of some costs that were formerly
classified as overhead. For example, the use of manufacturing cells makes it
easy to trace materials handling and machine operating costs as direct costs of
specific products or product families made in specific cells. Multiskilled workers
in cells also perform their own setups, maintenance and quality inspection so
that these costs become easily traced, direct costs of products made in specific
cells.
9. Backflush costing delays the recording of journal entries until after the physical
sequences have occurred. Typically, no record of work in process appears in the
accounting system.
10. Companies adopting backflush costing often meet the following conditions:
a. Management wants a simple accounting system.
b. Each product has a set of budgeted or standard costs.
c. Backflush costing yields approximately the same financial result as
sequential tracking would generate.
Backflush costing systems can differ in both the number and the placement of
trigger points for making journal entries in the accounting system:

Example Number of Journal Location of Journal

Entry Trigger Points Entry Trigger Points
1. 2 1. Purchase of direct
(raw) materials

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 2. Completion of good
finished units of
product.
2. 2 1. Purchase of direct
(raw) materials.
2. Sale of good
finished units of
product.
3. 1 1. Completion of good
finished units of
product.

II. Answers to Exercises

Exercise 1 (Operation costing)

Requirement 1
Cutting Assembly Finishing
Conversion Costs:
Direct manufacturing labor costs P2,600 P16,500 P4,800
Manufacturing overhead costs 3,000 22,900 3,300
Conversion costs P5,600 P39,400 P8,100
Total units produced:
1,200 + 600 + 200 2,000 2,000
1,200 + 600 1,800
Conversion cost per unit P2.80 P19.70 P4.50

Requirement 2
Standard Home Industrial
Tool Box Costs:
Direct materials costs P18,000 P6,660 P5,400
Conversion costs
Cutting, (1,200; 600; 200 × P2.80) 3,600 1,680 560
Assembly, (1,200; 600; 200 × 23,640 11,820 3,940
P19,70)
Finishing, (1,200; 600 × P4.50) 5,400 2,700 --
Total costs P50,400 P22,860 P9,900

Divided by quantity produced 1,200 600 200

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Cost per unit P42.00 P38.10 P49.50

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Requirement 3. Journal Entries

1. Work in Process, Cutting 30,060

Materials Inventory Control (direct materials used in cutting operation)

2. Conversion Costs 53,100

Various accounts (such as wages payable and accumulated depreciation)

3. Work in Process, Cutting 5,60

Conversion cost allocated (conversion cost allocated to cutting operation)

4. Work in Process, Assembly 35,660

Work in Process, Cutting (transfers of boxes from cutting to assembly, direct materials P30,060 plus
conversion costs in cutting operations, P5,600; all costs accumulated in Work in process, Cutting
are transferred since there is no beginning or ending work in process in cutting)

5. Work in Process, Assembly 39,400

Conversion costs allocated (conversion costs allocated to assembly operations)

6. Finished Goods Control 9,90

Work in Process, Finishing 65,160
Work in Process, Assembly (of total costs of P75,060 incurred up to assembly operations,
transferred-in costs of P35,660 plus conversion costs in assembly operations P39,400, P9,900
pertain to finished industrial boxes and P65,160 are transferred to finishing operations; all costs
accumulated in Work in Process, Assembly are transferred since there is no beginning or ending
work in process assembly)

7. Work in Process, Finishing 8,10

Conversion Costs, Allocated (conversion costs allocated to finishing operations)

8. Finished Goods Control 73,260

Work in Process, Finishing (transfers to finished boxed from finishing operations, transferred-in
costs of P65,160 into finishing plus conversion costs in finishing operations, P8,100; all costs
accumulated in Work in Process. Finishing are transferred since there is no beginning or ending
Work in Process in finishing)
Exercise 2 (Backflush journal entries and JIT production)

Requirement 1. Journal entries for April are as follows:

Entry (a) Inventory: Raw and In-Process Control

8,800,000
Accounts Payable Control (direct (raw) materials purchased)
8,800,000
Entry (b) Conversion Costs Control
4,200,000
Various Accounts (such as Accounts and Wages Payable Control)
4,200,000
(conversion costs incurred)

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 Entry (c) Finished Goods Control
12,500,000
Inventory: Raw and In-Process Control
8,500,000
Entry (d) Cost of Goods Sold
11,900,000
Finished Goods Control (standard costs of finished goods sold)
11,900,000

Requirement 2

Inventory:
Raw and In-Process Control Finished Goods Control Cost of Goods Sold
Direct (a) 8,800,000 (c) 8,500,000 (c) 12,500,000 (d) 11,900,000 (d)11,900,000
materials

Bal. 300,000 Bal. 600,000

Conversion Costs Allocated

Conversion (c) 4,000,000

Costs
Conversion Costs Control
(b) 4,220,000

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Requirement 3
Under the ideal JIT production system, if the manufacturing lead time per unit is very
short, there, conceivably, would be zero inventories at the end of each day. Entry (c)
would be for P11,900,000 finished goods production, not P12,500,000. If the
marketing department could only sell goods costing P11,900,000, the JIT production
system would call for direct material purchases and conversion costs of even lower
than P8,500,000 and P4,000,000, respectively, in Entries (a) and (b).

Exercise 3 (JIT purchasing, choosing suppliers)

Requirement 1
Solution Exhibit Exercise 3 presents the net cash savings of P1,854 from
purchasing the toys from Donnie Corporation rather than Thea Corporation. On
the basis of these calculations, Tristan should choose Donnie.

Requirement 2
Other factors that Tristan should consider before choosing a supplier are:
a. The reputation benefits (i) having products available rather than out of stock
when customers want to make purchases, and (ii) supplying quality products
that customers are satisfied with.
b. The supplier’s flexibility to supply cars at short notice, if Tristan needs
supplies urgently.
c. The supplier’s commitment to continuously improve cost, quality and
delivery performance.
d. Tristan confidence in building a long-run relationship with the supplier based
on trust and the willingness to share confidential information with each
other.
e. The range of other products that the supplier can supply to Tristan.

Solution Exhibit Exercise 3

Annual Relevant Costs of Purchasing from Donnie and Thea.

Incremental Incremental
Costs of Costs of
Relevant Item Purchasing Purchasing
from Donnie from Thea
Purchasing costs
P50 per unit × 4,000 units per year P200,000
P49 per unit × 4,000 units per year P196,000

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Inspection costs
P20 per delivery × 50 deliveries 1,000
P28 per delivery × 50 deliveries 1,400

Required return in investment

15% per year × P50 × 40* units of average
inventory per year 300
15% per year × P49 × 40* units of average
inventory per year
Outlay carrying costs (insurance, material
handling, breakage, etc. 294
P11 per unit per year × 40* units of average
inventory per year 440
P10 per unit per year × 40* units of average
inventory per year 400
Stockouts costs
P25 per car × 20 cars 500
P26 per car × 150 cars 3,900

Customer return costs

P21 per car returned × 40 cars returned 840
P21 per car returned × 140 cars returned ____ 2,940

Total annual relevant costs P203,080 P204,934

Annual difference in favor of Donnie P1,854___

* Order quantity + 2 = 80 ÷ 2 = 40

Exercise 4 (JIT production, relevant benefits, relevant costs)

Requirement 1
Solution Exhibit Exercise 4 presents the annual net benefit of P154,000 to
Bremer Corporation of implementing a JIT production system.

Requirement 2
Other nonfinancial and qualitative factors that Bremer should consider in
deciding whether it should implement a JIT system include:

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a. The possibility of developing and implementing a detailed system for
integrating the sequential operations of the manufacturing process. Direct
materials must arrive when needed for each subassembly so that the
production process functions smoothly.
b. The ability to design products that use standardized parts and reduce
manufacturing time.
c. The ease of obtaining reliable vendors who can deliver quality direct
materials on time with minimum lead time.
d. Willingness of suppliers to deliver smaller and more frequent orders.
e. The confidence of being able to deliver quality products on time. Failure to
do so would result in customer dissatisfaction.
f. The skills levels of workers to perform multiple tasks such as minor repairs
and maintenance, and quality testing and inspection.

Solution Exhibit Exercise 4

Annual Relevant Costs of Current Production System and JIT Production System
for Bremer Corporation

Incremental Incremental
Relevant Item Costs Under Costs
Current Under JIT
Production Production
System System
Annual tooling costs - P150,000
Required return on investment
12% per year × P900,000 of average inventory P108,000
per year
12% per year × P200,000 of average inventory 24,000
per year
Insurance, space, materials handling and setup 200,000 140,000a
costs
Rework costs 350,000 280,000b
Incremental revenues from higher selling prices - (90,000)c
Total net incremental costs P658,000 P504,000

Annual difference in favor of JIT production P154,000___

a
P200,000 (1-0.30) = P140,000
b
P350,000 (1-0.20) = P280,000
c
P3 × 30,000 units = P90,000.

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 III. Answers to Multiple Choice
1. B 5. D
2. B 6. C
3. A 7. B
4. A

Answer to Test Material 8-1

Requirement 1. Journal entries for August are as follows:

Entry (a) Inventory: Raw and In-Process Control 550,000
Accounts Payable Control (raw
materials and components purchased) 550,000
Entry (b) Conversion Costs Control 440,000
Various Accounts (such as Accounts
Payable and Wages Payable) 440,000
(conversion costs incurred)
Entry (c) Finished Goods Control 945,000
Inventory: Raw and In-Process Control 525,000
Conversion Costs Allocated (standard
costs of 21,000 units of finished goods
produced at P45 per unit; direct
materials, P25 per unit; conversion costs,
P20 per unit) 420,000
Entry (d) Cost of Goods Sold 900,000
Finished Goods Control (standard costs
of 20,000 units of finished goods sold) 900,000

Requirement 2

Inventory:
Raw and In-Process Control Finished Goods Control Cost of Goods Sold
Direct (a) (c) 525,000 (c) 945,000 (d) 900,000 (d) 900,000
materials 550,000

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 Bal. 25,000 Bal. 45,000

Conversion Costs Allocated

Conversion (c) 420,000

Costs
Conversion Costs Control
(b) 440,000

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