CHAPTER 11:

JUST IN TIME AND BACK FLUSH ACCOUNTING

LEARNING OBJECTIVES

Upon completion of this chapter, you should be able to

 Understand the JIT philosophy

 Describe a Just-In-Time production system
 Know and understand the five key elements involved in the operation of a JIT System
 Differentiate the JIT System from the traditional costing system
 Identify the major features of a just-in-time production system
 Explain how just-in-time system simplify job costing
 Prepare journal entries for backflush-costing system

INTRODUCTION

JUST-IN-TIME COSTING

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.

Just-In-Time System is a comprehensive production and inventory system that purchases or

produces materials and parts only as needed and just in time to be used at each stage of the production
process.

Just-In-Time refers to a system in which materials arrive exactly as they are needed.

A key element of Just-In-Time is Just-In-Time Production.

Just-In-Time (JIT) Production is a system in which each component on a production line is

produced immediately as needed by the next step in the production line.

The JIT manufacturing philosophy originated in Japan (primarily by Toyota and Kawasaki) and is
being increasingly utilized by American manufacturing companies.

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 next operation.

JIT calls also for the transfer of finished goods directly to the vehicles used to deliver them to
customers, rather than to storage. 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.

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 interest. This type of production is consistent with the production process that is used

1 COST ACCOUNTING - JUST-IN-TIME AND BACKFLUSH ACCOUNTING

by companies which wait for the receipt of customer orders before beginning production such as: custom
furniture manufacturers, custom shipbuilders and custom homebuilders.

In a Just-In-Time (JIT) inventory system, also known as a lean production system, materials are delivered
to the factory immediately prior to their use in production.

A lean production system significantly reduces inventory carrying cost by requiring that the raw
materials be delivered just in time to be placed into production. Also, many manufacturing functions that
were performed in individual departments in a traditional manufacturing system are combined into work
centers, called manufacturing cells.

The JIT “pull” manufacturing system credo is “Don’t make anything for anybody until they are ask
for it.” For JIT to work successfully, ahigh degree of coordination and cooperation must exist between the
manufacturer and the customer. This coordination between supplier, shipper, manufacturer, and customer is
known as supply chain management.

DISTINGUISING CHARACERISTICS OF JIT COSTING

 Production cost 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.

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 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 finished goods or work-in-process respectively.

JIT costing is sometimes referred to as BACKFLUSH COSTING.

FIVE (5) KEY ELEMENTS INVOLVED IN THE OPERATIONS OF A JIT SYSTEM

2 COST ACCOUNTING - JUST-IN-TIME AND BACKFLUSH ACCOUNTING

 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. (eg. through employee training)
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.
5. A company must develop a flexible work force.

FINANCIAL BENEFITS OF JIT

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. Reduction 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 customer.
8. Reductions in paperwork.

MAJOR FEATURES OF JIT PRODUCTION SYSTEM

These are five (5) 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 multi-skilled so that they are capable of performing a variety of operations
and tasks.
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 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
goods.
5. Suppliers are carefully selected to obtain delivery of quality-tested parts in a timely manner.

DIFFERENCES BETWEEN JIT COSTING AND TRADITIONAL COSTING

Just-in-time (JIT) costing differs from traditional costing with regards to the accounts used and the
timing of the cost recording.

1. Instead of using separate accounts for Material and Work-in-process as in traditional costing, JIT
costing system combines these into a Raw and In Process account.
2. Direct labor is usually considered a minor cost time in 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 applies to products as they are being produced and is recorded into
the Work-in-process account. In JIT costing, overhead is not applies to production until they are
completed.

COMPARING JIT SYSTEM WITH TRADITIONAL COSTING

The following transactions occurred during January.

3 COST ACCOUNTING - JUST-IN-TIME AND BACKFLUSH ACCOUNTING

 A. Trams purchased Php 170,000 of raw materials.
B. All materials purchased were requisitioned for production.
C. Trams incurred direct labor cost of Php 80,000.
D. Actual factory overhead cost amounted to Php 122,000
E. Trams applied conversion cost total Php 202,000 (including direct labor cost of Php 80,000)
F. Al telephones were completed and sold.

These transactions would be recorded in a traditional costing system as follows:

A. Materials 170,000
Accounts Payable 170,000

B. Work In Process 170,000

Materials 170,000

C. Work In Process 80,000

Accrued Payroll 80,000

D. Factory Overhead 122,000

Miscellaneous Accounts 122,000

E. Work In Process 122,000

Factory Overhead 122,000

F. Finished Goods 372,000

Work In Process 372,000

Cost of Goods Sold 372,000

Finished Goods 372,000

The general ledger (T-accounts) will appear as follows:

Materials Work In Process

a) 170,000 b) 170,000 b)170,000 f) 2,000

c) 80,000
e) 122,000

Finished Goods Factory Overhead

f) 372,000 f) 372,000 d) 122,000 e) 122,000

Accrued Payroll Cost of Goods Sold

c) 80,000 f) 372,000

Under JIT costing, no entries are made for transaction b, c and e. Entry b is not necessary because the
placement of materials into productions is implied in transaction (a) when the materials are first received. No
separate entry is made for (c) because direct labor is combined with factory overhead and maybe debited
first t conversion cost or maybe debited direct to cost of goods sold.

The JIT costing system would record the January transactions in the following manner.

4 COST ACCOUNTING - JUST-IN-TIME AND BACKFLUSH ACCOUNTING

 A. Raw and In Process 170,000
Accounts Payable 170,000
B. A
C. Conversion Cost 80,000
Accrued Payroll 80,000

D. Conversion Cost 122,000

Miscellaneous Accounts 122,000
E. S
F. Cost of Goods Sold 372,000
Raw and In Process 170,000
Conversion Cost 202,000

The General Ledger (T-accounts) will appear as follows:

Raw and In Process Conversion Cost

a) 170,000 f) 170,000 d) 202,000 f) 202,000

Cost of Goods Sold Wages Payable

f) 372,000 f) 80,000

SUMMARY OF COST FLOWS IN JIT COSTING

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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 Php 4,000

2. Direct labor costs of Php 10,400 and overhead costs of Php 7,800 were incurred and applied,
respectively, during the month of January.
3. The cost of work in process at January 31 was Php 3,600. This cost was determined through
the production report and is composed of the following elements:
Direct Materials Php 1,500
Direct Labor Php 2,850
Overhead Php 2,150

The journal entries under JIT costing are shown below.

1. Raw and In Process 4,000

Accounts Payable 4,000
To record product costs

2. Cost of Goods Sold 18,200

Wages Payable 10,400
Factory Overhead Control 7,800
To record product costs

3. Finished Goods 2,500

Raw and In Process 2,500
To record transfer of cost of units completed

Materials received 4,000

Less: Mat. In RIP 1,500
Amount to be backflushed 2,500

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 4. Cost of Goods Sold 1,000
Finished Goods 1,000
To record transfer of units sold

Materials cost of units comp 2,500

Less: Mat. In FG end 1,500
Amount to be backflushed 1,000

5. Raw and in Process 2,100

Finished Goods 5,000
Cost of Goods Sold 7,100
To adjust cost of goods sold

For Raw and In Process:

Labor cost - raw and in process 1,200
Overhead – raw and in process 900
Total to be adjusted 2,100

For Finished Goods:

Labor cost – finished goods 2,850
Overhead – finished goods 2,150
Total to be adjusted 5,000

BACKFLUSH ACCOUNTING

Backflushing is also known as Backflush costing, or Backflush accounting.

Backflush costing is a simplified approach to determining product cost is that is used when there is
a little or no work-in-process inventory.

The backflush method is reasonable and convenient for a JIT production environment.

Backflushing is a shortened version of the traditional method of accounting for cost.

The purpose of Backflush costing is to simplify and to reduce the number of events that are
measured and recorded in the accounting system.

Compared to Job Order Costing and Process Costing, it will be noted that there is no detailed tracking
of the cost of work in process.

Under the 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.

Backflush costing eliminates some of the accounting steps under traditional costing and some of the
general ledger are combined into one. (eg. Materials account and Work in process account which are
combined into one account- Raw and In Process)

Under Backflush costing some or all elements of the cost of output are determined only after the
production is completed.

Backflushing costing is the name from the fact that costs are not “flushed out” of the accounting
system and charged to the products until the goods are completed and sold.

ILLUSTRATIVE PROBLEM

7 COST ACCOUNTING - JUST-IN-TIME AND BACKFLUSH ACCOUNTING

 A brief illustration of backflush costing follows. Assume that a company has the following
information for a given month of activity:

Purchase of direct materials Php 200,000

Direct materials used Php 180,000
Conversion Cost incurred Php 250,000
Conversion Cost Applied Php 300,000

The inventory of direct materials increased by Php 20,000 (200,000-180,000) during the month, and
conversion costs were overapplied by Php 50,000 (300,000-250,000). The company charges overapplied or
underapplied conversion cost to cost of goods sold at the end of the year. The journal entries to record (1) the
purchase of direct materials, (2) the conversion cost incurred, and (3) the completion of finished product
during the month follow. Note there are no entries involving the WIP account, since backflush costing do not
use the WIP account.

(1) Materials Inventory 200,000

Accounts Payable, Cash 200,000

(2) Conversion Cost Account 250,000

Wages Payable, Other Accounts 250,000

(3) Finished Goods 480,000

Materials Inventory (for actual usage) 180,000
Conversion cost (applied) 300,000

The 50,000 of overapplied conversion cost is closed to cost of goods sold at the end of the year. This
example illustrates the simplicity of backflush costing, which can be applied conveniently when work in
process inventory is negligible.

TRUE OR FALSE

For each of the following statements, enter a T or and F In the blank to indicate whether the statement is true
or false.

___ 1. One purpose of a JIT inventory system is to have goods ready just when the customer needs them.

___ 2. Under JIT, materials are "pushed" from one workstation to another to ensure timely completion of
finished products.

___3. A company' will typically have fewer suppliers under JIT than a conventional system.

___ 4. For JIT to operate successfully, all similar pieces of equipment (such as lathers or drill presses) must be
grouped together.

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___5. One way to reduce inventories is too reduce the setup time needed between production runs.

___6. The most effective way to achieve total quality control is to have an Inspection Department that inspects
all incoming raw materials, and inspects goods as they move along the product flow line.

___ 7. In a JIT environment, workers are expected to be cross-trained and work as a team.

___8. Under JIT, process time and queue time would both be considered value-added activities.

___9. The time involved in changing equipment and getting jigs and forms in place to accommodate the
production of a different item is known as the setup time.

___10. The workforce under JTT has Iess responsibility for quality control than in a conventional production
system.

PROBLEMS

Problem – Stillwater Manufacturing

Stillwater Manufacturing has a cycle time of less than a day, uses a Raw and In Process (RIP) account and
expenses 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 accordingly.
Raw material is backflushed from RIP to Finished Goods. The following information is for the month of
August.

RIP beginning, including P25,560 of conversion cost P42,600

FG beginning, including P27,000 of conversion cost P45,000

Raw Materials purchased on credit P356,000

RIP end, including P13,500 of conversion cost estimate P22,500

FG end, including P9,600 of conversion cost estimate P16,000

Direct Labor – P350,000; factory overhead – P196,150,000

Required: Prepare all journal entries that involve the RIP account and/ or finished goods account

Problem- Magnolia Corporation

The Magnolia Corporation has a cycle time of l.5 days, uses a raw and in process 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 materials cost is
backflushed from raw and in process account to finished goods. The fallowing information is for July.

Beginning balance of RIP account, including P23,400

P14,040 of conversion cost

Beginning balance of finished goods account,

including Pl4,400 ofconversion cost P24,000

Raw materials received on credit P444,000

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 Ending RIP inventory per physical count including

P15,360 conversion cost estimate P25,600

Ending FG inventory per physical count, including

Pl 1,400 conversion cost estimate P19,000

Conversion cost (direct labor – P210,000; factory overhead - PI89,000)

Required: Journal entries to record the given transactions

Problem – Chiz Manufacturing Company

The Chiz Manufacturing Company has a cycle time of 2.0 days, uses a Raw and In Process account (RIP) 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 materials cost
is backflushed from RIP to Finished Goods. The following is for the month of May.

RIP beginning, including P12,000 of conversion cost

FG beginning, including P8,800 of conversion cost

Raw Materials purchased on credit

RIP End, including P15,700 of conversion cost

FG end, including P13,100 of conversion cost

Conversion Cost- P180,000 of direct labor and P225,000 of overhead

Requirements:

1. Amount of materials backflushed from RIP to Finished Goods

2. Amount of materials backflushed from Finished Goods to Cost of Goods Sold.
3. Journal Entries to record the given Instructions

Problem – Matsui Industries

Matsui Industries produces 10,000 units each day, and the average number of units in work in process is
40,000.

1. Determine the throughput time.

2. If the same daily output can be achieved while reducing the work in process by 75%, determine the new
throughput time.
Problem – GGT. Co.

GGT Co. uses backflush costing to account for its manufacturing costs. The trigger points are the purchase of
materials, the completion of goods, and the sale of goods. Prepare journal entries to account the following:

a) Purchased raw materials, on account, $80,000

b) Requisitioned raw materials to production, $80,000
c) Distributed direct labor costs, $10,000
d) Manufacturing overhead costs incurred, $60,000. (Use Various Credits for the account in the credit
part of the entry.)
e) Completed all of the production started

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 f) Sold the completed production for $225,000, on account.
(Hint: Use a single account for raw materials and work in process.)

Problem - Matsui Industries and GGT Co.

In Problem Matsui Industries and GGT. Co. , prepare any journal entries that would have been different if the
only trigger points had been the purchase of materials and the sale of finished goods.

Problem – DDB. Co

DDB Co. uses backflush costing to account for its manufacturing costs. The trigger points are the purchase of
materials, the completion of goods, and the sale of goods. Prepare journal entries to account for the following:

a) Purchased eaw materials, on account, $70,000.

b) Requisitioned raw materials to production, $70,000.
c) Distributed direct labor costs, $15,000.
d) Manufacturing overhead costs incurred, $45,000. (Use Various Credits for the account oin the credit part if
the entry.)
e) Completed all of the production started.
f) Sold the completed production for $195,000, on account.
(Hint: Use a single account for raw materials and work in process.)

Problem – DDB Co. 2

In Problem DDB. Co. prepare any journal entries that would have been different if the only trigger points had
been the purchase of materials and the sale of finished goods.

Problem – Machine shop manufacturers

A machine shop manufactures a stainless steel part that is used in an assembled product. Materials charged to
a particular job amounted to %600. At the point of final inspection, it was discovered that the material used
was inferior to the specifications required by the engineering department; therefore, all units had to be
scrapped.

Record the entries required for scrap under each of the following Conditions:

a) The revenue received for scrap is to be treated as a reduction in manufacturing cost but cannot be
identified with a specific job. The value of stainless steel scrap is sold two months later for cash at the
estimated value of $125.
b) Revenue received for scrap is to be treated as reduction in manufacturing cost but cannot be
identified with a specific job. A firm price is not determinable for the scrap until is sold. It is sold
eventually for $75 cash.
c) The production job is a special, and the $85 received on account for the scrap is to be treated as a
reduction in manufacturing cost. (A firm price is not determinable for the scrap until it is sold, and
the amount to be received for the scrap is to be treated as other income.)

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