Chapter 6

Just-In-Time & Backflush Accounting

Learning objectives
Upon completion of this chapter, you should be able to:
1. Understand the JIT philosophy.
2. Know and understand the five key elements involved in the operation of a
JIT system.
3. Differentiate the JIT system from the traditional costing system.
What is the Just-in-time philosophy?
● The JIT manufacturing philosophy originated in Japan (primarily by Toyota
and Kawasaki) and is being increasingly utilized by American
manufacturing companies.
● 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 and products are completed just in time to be
shipped to customers.
What is the Just-in-time philosophy?
● JIT requires raw materials to be delivered at exactly the points they are
needed, and just when they are needed to initiate production.
● Partially processed goods are expected to move through the factory in
such a way that goods come out of one operation just in time to be
processed in the next operation.
● JIT calls also for the transfers of finished goods directly to the vehicles
used to deliver them to customers, rather than to storage.
● Such arrangement completely eliminates the need for the warehouse
space that has been considered an expensive part of any manufacturing
operation.
What is the Just-in-time philosophy?
● It also reduces the cost of handling, from the point of delivery of raw
materials to the point where the finished product is shipped to the
customer.
● Goods would be handled less often and the smaller quantities involved
might eliminate the need for expensive bulk-moving equipment such as
forklift.
What is the Just-in-time philosophy?
● JIT manufacturing is characterized by decisions made by companies to
intentionally maintain relatively small inventory levels.
● Companies manufacturing inventory under the JIT philosophy attempt to
minimize the time which elapses between the beginning of production to
the completion of production and ultimate sale of inventory to the
organization’s customers.
● Thus, inventory production is normally “on demand”.
● This type of production is consistent with the production process that is
used by companies which wait for the receipt of customer orders before
beginning production such as: custom furniture manufacturers, custom
shipbuilders and custom homebuilders.
What is the Just-in-time philosophy?
● The distinguishing characteristic of JIT costing is that production costs are
accumulated with inventory at later stages of the production process.
● The rationale for this difference is that JIT assumes that small (if any)
quantities of direct materials, work in process, and finished goods
inventories will be maintained.
What is the Just-in-time philosophy?
● Since JIT assumes that the work in process and finished goods inventory
maintained by the organization will be minimal, labor and overhead are
normally accumulated directly in cost o 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
finished goods or work in process, respectively.
● For this reason, JIT costing is often referred to as backflush costing.
Five 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. One
way to do this is through employee training. Another way is through
automation by creating a flexible manufacturing system (FMS). An FMS is
just one part of the overall concept of computer-integrated
manufacturing, in which a company’s business functions are integrated
with its manufacturing functions.
Five Key Elements involved in the operation of a JIT
system
4. A company must develop a system of total quality control (TQC) over its
parts and materials. In the absence of TQC, it would be impossible to
successfully implement a JIT system. TQC starts with suppliers, who must
inspect goods before they are shipped to ensure that the goods are free
of defects. The company’s own employees are responsible to inspect their
own work before sending partially completed units on to the next
workstation.

5. A company must develop a flexible workforce. Since the plant layout in JIT
environment is different from that of a conventional factory, workers
must be multi-skilled. In addition to being able to operate all of the
machines in a manufacturing cell, workers must also be able to perform
● An individual firm in the present environment can, by careful scheduling
of production based on market projections (or, even better, based on
actual orders), reduce the level of finished goods inventory.
● By using such production schedules and working with a limited number
of suppliers of raw materials, the level of raw materials inventory can also
be minimized.
● Processing time and the amount of work in process inventory can also be
minimized by rearranging production facilities into manufacturing cells
(minifactories) which include all the machines required to produce a
particular part.
● Such an arrangement reduces the amount of movement partially
processed units required in the production process.
Three (3) major differences of JIT costing &
traditional costing
1. Instead of using separate accounts for Material and Work in Process as in
traditional costing, JIT costing combines these into 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. Direct labor and factory
overhead are usually charged to a Conversion Cost account or sometimes
direct to Cost of Goods Sold account.
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.
Illustration
To compare JIT costing with traditional costing, assume that Trams Co.
manufactures cellular telephones and uses a JIT production system. The
following transactions occurred during January:

a. Trams purchased ₱170,000 of raw materials.

Traditional costing:

JIT costing:
Illustration
To compare JIT costing with traditional costing, assume that Trams Co.
manufactures cellular telephones and uses a JIT production system. The
following transactions occurred during January:

b. All materials purchased were requisitioned for production.

Traditional costing:

JIT costing: No entry.

Illustration
To compare JIT costing with traditional costing, assume that Trams Co.
manufactures cellular telephones and uses a JIT production system. The
following transactions occurred during January:

c. Trams incurred direct labor costs of ₱80,000.

Traditional costing:

JIT costing:
Illustration
To compare JIT costing with traditional costing, assume that Trams Co.
manufactures cellular telephones and uses a JIT production system. The
following transactions occurred during January:

d. Actual factory overhead costs amounted to ₱122,000.

Traditional costing:

JIT costing:
Illustration
To compare JIT costing with traditional costing, assume that Trams Co.
manufactures cellular telephones and uses a JIT production system. The
following transactions occurred during January:

e. Trams applied conversion costs total of ₱202,000 (including direct labor

cost of ₱80,000).

Traditional costing:

JIT costing: No entry.

Illustration
To compare JIT costing with traditional costing, assume that Trams Co.
manufactures cellular telephones and uses a JIT production system. The
following transactions occurred during January:

f. All telephones were completed and sold.

Traditional costing:

JIT costing:
Summary of cost flow in JIT costing
Illustrative problem
Assume that Wilkins Company uses JIT costing for the production of goods
during the month of January. The following transactions summarize the
major steps in Wilkins’ production during the month of January:

1. Raw materials received from suppliers amounted to ₱4,000.

Illustrative problem
Assume that Wilkins Company uses JIT costing for the production of goods
during the month of January. The following transactions summarize the
major steps in Wilkins’ production during the month of January:

2. Labor costs of ₱10,400 and overhead costs of ₱7,800 were incurred and
applied, respectively, during the month of January.

Accounts payable
Illustrative problem
Assume that Wilkins Company uses JIT costing for the production of goods
during the month of January. The following transactions summarize the
major steps in Wilkins’ production during the month of January:

3. The cost of work in process at January 31 was ₱3,600. This cost was
determined through the production report and is composed of the
following elements:

In addition, assume that finished goods inventory at January 31 was

₱6,500 consisting of:
Illustrative problem
Assume that Wilkins Company uses JIT costing for the production of goods
during the month of January. The following transactions summarize the
major steps in Wilkins’ production during the month of January:

3.
Illustrative problem
Assume that Wilkins Company uses JIT costing for the production of goods
during the month of January. The following transactions summarize the
major steps in Wilkins’ production during the month of January:

4.
Illustrative problem
Assume that Wilkins Company uses JIT costing for the production of goods
during the month of January. The following transactions summarize the
major steps in Wilkins’ production during the month of January:

5.
Backflushing
● Also known as backflush costing or backflush accounting.
● It is a shortened version of the traditional method of accounting for cost.
● Under job order costing and process costing, numerous subsidiary
records of the cost of the work in process are maintained and these
records are updated by many accounting entries.
● Under JIT system, where the time from the receipt of the materials to the
completion of product is reduced to a few hours, the usefulness of
tracking the cost of the WIP becomes impractical.
Backflushing
● The purpose of backflush costing is to simplify and to reduce the number
of events that are measured and recorded in the accounting system.
● If we compare it to job order and process costing, it will be noted that
there is no detailed tracking of the cost of WIP.
● Under backflush costing, the inventories are not adjusted during the
accounting period to reflect the different production costs; instead,
adjustments are made at the end of the period.
● Detailed subsidiary records are not maintained for units in process.
Backflushing
● Backflush costing eliminates some of the accounting steps under the
traditional costing and some of the general ledger accounts are combined
into one.
● Example will be the materials and WIP accounts which are combined into
one account – Raw and In Process.
● Raw materials received are put immediately into production, so materials
and WIP are combined in a single account.
● Under backflush costing some or all elements of the cost of output are
determined only after the production is completed.
Backflushing
● Under job order and process costing, the cost of the completed units is
determined by assigning the three element s of cost – direct materials,
direct labor, and factory overhead – to the WIP at various stages during
production.
● Under backflush costing some or all elements of the cost of output are
determined only after the production is completed.
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