UNIT VI – JUST-IN-TIME (JIT)/BACKFLUSH ACCOUNTING

Just-in-time
 means that 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
 requires the raw materials to be delivered at exactly the point they are needed to initiate production.
 goods come out of one process operation just in time to be processed in the next operation
 finished goods are transferred directly to the delivery vehicles to delivery then to customers rather to
storage.
 completely eliminates the needs for warehouse space and reduces costs of handling.
 Companies using JIT regard carrying inventory as nonvalue added activity and they attempt to
minimize inventory by making components available just in time to be used in the production
process.
 Differences between JIT costing and 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 item 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.
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 the production is
completed.

Backflush Accounting
 a short-cut approach to accounting for the flow of manufacturing operations. It delays recording
journal entries until the goods moved through the production process.
 costing procedure that omits recording some or all of the journal entries relating to the cycle from
purchases of raw materials to the sale of finished goods. When journal entries for one or more
stages in the cycle are omitted, the journal entries for subsequent stage used normal or standard
cost to work backward in order to flush out costs in the cycle where journal entries are omitted. No
separate accounting for work in process is made.
 often used by companies that have adopted just-in-time (JIT) regarding inventory control.
 Has the following features:
1. Work in process is usually eliminated.
2. Journal entries to inventory account may be delayed until the time of product completion.
 Actual conversion costs are recorded as incurred, same as that under conventional recording
system. Conversion costs are then applied to products at various trigger points. It is assumed that
any conversion costs not applied to products are carried forward and disposed of at year-end.

Case 1 Case 2 Case 3

Three trigger points Two trigger points Two trigger points
Trigger points Stage 1: Purchase of Stage 1: Purchase of
Raw materials Raw materials
Stage 3: completion of Stage 3: completion of
Finished goods Finished goods
Stage 4: Sale of finished Stage 4: Sale of Stage 4: Sale of
Goods finished finished
Goods Goods
Inventory account Materials and In Process Materials Inventory
Inventory account
Finished Goods Inventory Finished Goods
Inventory
 Main features Use of combines Materials No finished goods No materials Inventory
and In Process Inventory inventory account account.
account

Illustrative problem (source: Cost Accounting (2018) by Pedro P. Guerrero)

The following data are provided by Cookie Manufacturing Company:

Materials purchased on credit P 195,000

Actual conversion costs incurred 126,000
Number of units manufactured 10,000 units
Number of finished units sold 9,900 units
Standard cost per units:
Materials P 19
Conversion costs 12

There are no beginning inventories of raw materials. Any underapplied or overapplied conversion costs
are adjusted to cost of goods sold at the end of the period.

Case 1: Three trigger points – at purchase of direct materials (stage 1), completion of goods (stage 3) and
sale of finished goods (stage 4)

Transaction Journal entries

Purchase of direct Materials & In Process Inventory 195,000
materials Accounts Payable 195,000

Incur conversion costs Conversion Costs Control 126,000

Various accounts 126,000

Completion of finished Finished Goods Inventory 310,000

goods Materials & In Process Inventory 190,000
Applied conversion costs 120,000

Sale of finished goods Cost of goods sold 306,900

Finished goods 306,900

Underapplied/ Applied conversion costs 120,000

overapplied Cost of goods sold 6,000
Conversion costs control 126,000

Note: at the end of the period, the ending inventory balances are:
Materials and In Process Inventory ( 195,000 – 190,000) 5,000
Finished goods inventory ( 310,000 – 306,900) 3,100
Total 8,100

Case 2: Two trigger points – at purchase of direct materials (stage 1), and sale of finished goods (stage 4)

Transaction Journal entries

Purchase of direct Materials Inventory 195,000
materials Accounts Payable 195,000

Incur conversion costs Conversion Costs Control 126,000

Various accounts 126,000

Completion of finished No Entry

goods
 Sale of finished goods Cost of goods sold 306,900
Materials Inventory 188,100
Applied conversion costs 118,800

Underapplied/ Applied conversion costs 118,800

overapplied Cost of goods sold 7,200
Conversion costs control 126,000

Case 3: Two trigger points – completion of finished goods (stage 3), and sale of finished goods (stage 4)

Transaction Journal entries

Purchase of direct No Entry
materials

Incur conversion costs Conversion Costs Control 126,000

Various accounts 126,000

Completion of finished Finished Goods Inventory 310,000

goods Accounts Payable 190,000
Applied conversion costs 120,000

Sale of finished goods Cost of goods sold 306,900

Finished Goods inventory 306,900

Underapplied/ Applied conversion costs 120,000

overapplied Cost of goods sold 6,000
Conversion costs control 126,000

Illustrative Problem 2 (source: Cost Accounting & Control by Norma D. De Leon, et al.)

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

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

2. Direct labor costs of P 10,400 and overhead costs of P 7,800 were incurred and applied,
respectively, during the month of January.
3. The cost of work-in-process at January 31 was P 3,600. This cost was determined through the
production report and is composed of the following elements:
Direct materials P 1,500
Direct labor 1,200
Overhead 900

In addition, assume that finished goods inventory at January 31 was P 6,500, consisting of:
Direct materials P 1,500
Direct lalbor 2,850
Overhead 2,150

The Journal Entries under JIT costing:

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: materials in RIP 1,500
Amount to be backflushed 2,500

4. Cost of goods sold 1,000

Finished goods 1,000
To record transfer of units sold

Materials cost of units completed P 2,500

Less: Materials in FG, end 1,500
Amount to be backflushed P 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 & in process 1,200
Overhead – raw & 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
 UNIT VI – JUST-IN-TIME (JIT)/BACKFLUSH ACCOUNTING
Name: ______________________
Course: _____________________

Activity 1 :

1. The Pampanga Manufacturing Company uses a raw and in process inventory account and expenses all
conversion costs to the cost of goods sold account. At the end of each month, all inventories are
counted; their conversion costs components are estimated and inventory account balances are adjusted
accordingly. Raw material cost is backflushed from Raw materials inventory (RIP) to Finished Goods. The
following information is for the month of April:

Beginning balance of RIP account, including P 1,400 of conversion cost ………… P

31,000
Raw materials received on credit ………………………………………………………..
367,000
Ending RIP inventory per physical count, including P 1,800 conversion cost estimate
33,000

Compute the amount to be backflushed from RIP to Finished Goods:

a) P 365,000 b) P 368,600 c) P 367,000 d) P 365,400

2. Katherine, owner of JTR Company in Davao, which manufactures chopsticks for restaurants, has recently
decided to implement a JIT costing system. Transactions for August are as follows:

a) . Raw materials were purchased at the cost of P 950,000.

b) All materials purchased were requisitioned for production.
c) Direct labor costs of P 2,500,000 were incurred.
d) Actual factory overhead costs amounted to P 6,000,000.
e) Applied conversion costs totaled P 8,100,000. This included P 2,500,000 of direct labor.
f) All units were completed.

Compute the amount of Finished Goods after all transactions have been completed:
a) P 8,500,000 b) P 9,050,000 c) P 10,600,000 d) P 9,650,000

3. If Edsa Company has material cost of P 10,000 in the June 1 RIP inventory account, and P 12,500 in the
June 30 RIP inventory account and the amount of raw materials used backflushed from RIP inventory
account on June 30 is P 202,500.

What is the amount of raw materials purchased on credit for the month of June?
a. P 205,000 b) P 200,000 c) P 225,000 d) not given ( specify)_____

4. Basilio Company has a cycle time of 3 days, uses a Materials and In Process (MIP) account, and charges
all conversion costs to Cost of Good Sold. At the end of each month, all inventories are counted, their
conversion costs components are estimated, and inventory account balances are adjusted. Raw material
cost is backflushed from MIP to Finished Goods. The following information is for June:

Beginning balance MIP account, including P 3,000 of conversion costs P 29,250

Beginning balance of finished goods account, including P 10,000 of conversion P 30,000
costs
Raw materials received on credit 562,500
Direct labor cost, P 375,000; Factory overhead applied, P 450,000 825,000
Ending MIP inventory per physical count, including P 4,500 of conversion costs 32,000
Ending finished goods inventory per physical count, including P 8,750 of conversion 26,250
costs

What is the conversion costs of units sold in June?

a. P 825,250 b) P 825,000 c) P 840,000 d) P 824,750

The Magnolia Corporation has a cycle time of 1.5 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 materials and in-process account to finished goods. The following
following information is for July.

Beginning balance of Raw and in-process account, including P 14,040 of conversion cost P 23,400
Beginning balance of finished goods account, including P 14,400 of conversion cost…… .… 24,000
Raw materials received on credit ……………………………………………………………………. . 444,000
Ending Raw and in-process inventory per physical count, including P 15,360
conversion cost estimate ……………………………………………………………………….…. 25,600
Ending Finished goods inventory per physical count, including P 11,400
conversion cost estimate…………………………………………………………………………. 19,000
Conversion cost ( direct labor – P 210,000; factory overhead – P 189,000)

REQUIRED: Prepare journal entries to record the given transactions.

7. The balance of the cost of goods sold after adjustment is _______________________