JUST-IN-TIME

COSTING
JIT SYSTEM (A QUICK REVIEW)

Firms use the just-in-time (JIT) method to minimize inventory and improve quality by
carefully coordinating the receipt of raw materials and the delivery of product with the
manufacturing processes in the plant.

The goal is to have little or no raw material, work-in-process, or finished goods inventory
in the plant. This saves costs that arise from holding inventory, including the risk of
damage, theft, loss, or failure to find a customer for the finished product.

2
JIT COSTING

Just-in-time costing is a costing system that simplifies accounting for companies.

▰ Tracks costs after the units are completed

▰ Combines Raw Materials Inventory and Work-in-Process Inventory into Raw and In-
Process Inventory

▰ The Conversion Costs account combines Direct Labor and Manufacturing Overhead
Costs

3
JIT COSTING vs TRADITIONAL COSTING

4
RECORDING TRANSACTIONS IN JIT

TRANSACTION 1: Sanderson Inc purchased P610,000 of raw materials on account

Notice that we debit Raw and In-Process Inventory account. This is because in a JIT
costing, it is expected that an order has already been placed, thus the raw materials go
directly into process.

5
RECORDING TRANSACTIONS IN JIT

TRANSACTION 2: Sanderson Inc incurred P510,000 for labor and overhead

6
RECORDING TRANSACTIONS IN JIT

TRANSACTION 3: Sanderson Inc completed 2,000 books that it moved to Finished

Goods Inventory. The standard cost for each book P553.50 (P300 direct materials +
P253.50 conversion costs).

7
RECORDING TRANSACTIONS IN JIT

TRANSACTION 4: Sanderson Inc sold 1,900 books on account for P1,000 each, for a
total of P1.9M. The cost of goods sold is P1,051,650 (1,900 books x P553.50).

8
RECORDING TRANSACTIONS IN JIT

9
RECORDING TRANSACTIONS IN JIT

ADJUSTMENT OF CONVERSION COST: The actual conversion cost incurred was

P510,000 (see TRANSACTION 2). However, the amount of conversion cost allocated
based on the standard cost was P507,000 (see TRANSACTION 3). Thus we
underestimated our conversion cost.

10