Just-in-Time System and Backflush Costing

Just-In-Time Production Systems

Just-in-time (JIT) production systems take a

“demand pull” approach in which goods are
only manufactured to satisfy customer orders.
 Major Features of a JIT System

1. Organizing production in manufacturing cells

2. Hiring and retaining multi-skilled workers

3. Emphasizing total quality management

4. Reducing manufacturing lead time and setup time

5. Building strong supplier relationships

 Financial Benefits of JIT
1. Lower investments in inventories.

2. Reductions in carrying and handling costs of inventories.

1. Lower investments in inventories.
3. Reductions in risk of obsolete inventories.
2. Reductions in carrying and handling costs of inventories.
4. Lower investment in plant space for inventories and production.
3. Reductions in risk of obsolete inventories.
5. Reductions in setup costs and total manufacturing costs.

6. Reductions 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.
 Backflush Costing

Backflush costing describes a costing

system that delays recording some or
all of the journal entries relating to the
cycle from purchase of direct materials
to the sale of finished goods.
 Backflush Costing

Where journal entries for one or more stages

in the cycle are omitted, the journal entries
for a subsequent stage use normal or standard
costs to work backward to flush out the costs in
the cycle for which journal entries were not made.
 Different ways
backflush costing can simplify
traditional job-costing systems.
 Trigger Points

The term trigger point refers to a stage in a cycle

going from purchase of direct materials to sale
of finished goods at which journal entries are
made in the accounting system.
 Trigger Points

Stage A: Stage B:
Purchase of Production resulting
direct materials in work in process

Stage C: Stage D:
Completion of good Sale of
units of product finished goods
 Trigger Points

Assume trigger points A, C, and D.

This company would have two inventory accounts:

Type Account Title

1. Combined materials 1. Inventory:
and materials in work Raw and In-process
in process inventory Control
2. Finished goods 2. Finished Goods Control
 Trigger Points

What is the journal entry when trigger point A occurs?

Inventory: Raw and In-process Control XX
Accounts Payable Control XX
To record direct material purchased during the period
 Trigger Points

What is the journal entry to record conversion costs?

Conversion Costs Control XX
Various accounts XX
To record the incurrence of conversion costs during
the accounting period
Underallocated or overallocated conversion costs
are written off to cost of goods sold.
 Trigger Points

What is the journal entry when trigger point C occurs?

Finished Goods Control XX
Inventory: Raw and
In-Process Control XX
Conversion Costs Allocated XX
To record the cost of goods completed during the
accounting period
 Trigger Points

What is the journal entry when trigger point D occurs?

Cost of Goods Sold XX
Finished Goods Control XX
To record the cost of goods sold during the
accounting period
 Trigger Points

Assume trigger points A and D.

This company would have one inventory account:

Type Account Title

Combines direct materials
inventory and any direct Inventory Control
materials in work in process
and finished goods inventories
 Trigger Points

What is the journal entry when trigger point A occurs?

Inventory: Raw and In-process Control XX
Accounts Payable Control XX
To record direct material purchased during the period
Same as the A, C, and D example.
 Trigger Points

What is the journal entry to record conversion costs?

Conversion Costs Control XX
Various accounts XX
To record the incurrence of conversion costs during
the accounting period
Same as the A, C, and D example.
 Trigger Points

What is the journal entry to record the

cost of goods completed during the
accounting period (trigger point C)?

No journal entry.
 Trigger Points

What is the journal entry when trigger point D occurs?

Cost of Goods Sold XX
Inventory Control XX
Conversion Costs Allocated XX
To record the cost of goods sold during the
accounting period
 Sample Problem
Assume that a company has the following information for a given
month of activity:
Purchase of direct materials P200,000
Direct materials used 180,000
Conversion costs incurred 250,000
Conversion costs applied 300,000
The inventory of direct materials increased by P20,000 (P200,000
– 180,000) during the month, and conversion costs were
overapplied by P50,000 (P300,000 – P250,000). The company
charges overapplied and underapplied conversion cost for cost of
goods sold at the end of the year. The journal entries to record (1)
the purchase of direct materials, (2) the conversion costs
incurred, (3) the completion of finished products during the
month follow, and (4) the closing of overapplied conversion costs.
 Answers:
(1) Raw and In-process P200,000
Accounts Payable / Cash P200,000
(2) Conversion Costs P250,000
Wages Payable / Various Accounts P250,000
(3) Finished goods P480,000
Raw and In-process P180,000
Conversion Costs P300,000
(4) Conversion Costs P 50,000
Cost of Goods Sold P 50,000
Answer Problem No. 1 in Chapter 6 page 171
 Problem 1 – Stillwater Manufacturing
1) Raw and In Process 356,000
Accounts Payable 356,000

2) Finished goods 364,040

Raw and In Process 364,040

Raw materials purchased 356,000

RIP beg. (42,600-25,560) 17,040
RIP end (22,500-13,500) ( 9,000)
Mat. content of units completed 364,040
 Problem 1 – Stillwater Manufacturing
3) Cost of goods sold 375,640
Finished goods 375,640

Mat. content of units completed 364,040

FG beg.(45,000-27,000) 18,000
FG. End (16,000-9,600) ( 6,400) 11,600
Mat. content of units sold 375,640

4) Cost of goods sold 546,150

Payroll 350,000
Factory Overhead 196,150
 Problem 1 – Stillwater Manufacturing
3) Cost of goods sold 375,640
Finished goods 375,640

Mat. content of units completed 364,040

FG beg.(45,000-27,000) 18,000
FG. End (16,000-9,600) ( 6,400) 11,600
Mat. content of units sold 375,640

4) Cost of goods sold 546,150

Payroll 350,000
Factory Overhead 196,150
 Problem 1 – Stillwater Manufacturing
4) Cost of goods sold 29,460
Raw and In Process 12,060
Finished goods 17,400

Conversion cost RIP FG

End 13,500 9,600
Beg. ( 25,560) (27,000)
Increase (decrease) ( 12,060) ( 17,400)
Answer Problem No. 2-4 in Chapter 6
pages 171-172