Just in Time and Backflush

Accounting
Chapter 5
Learning Objectives

 Understand the JIT philosophy

 Know and Understand the five key elements involved in the operation of a
JIT system
 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
 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 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 also transfers finished goods directly for delivery to
customers rather than to storage.
 This arrangement reduces the need for warehouse
space and reduces the cost of handling.
 Inventory production is normally “On Demand”.
 This type of production is consistent with the production
process used by companies which wait for receipt of
orders before beginning production.
Five Key Elements involved in the
operation of a JIT system
 A company must learn to rely on a few suppliers who are willing to make
frequent (even daily) deliveries in small lots
 A company must improve its product flow lines by creating an individual
flow line for each separate product
 A company must reduce the setup time between production runs.
 A company must develop a system of total quality control over its parts and
materials.
 A company must develop a flexible workforce.
JIT Costing
 Under JIT costing, production costs are accumulated with inventory
at later stages of the production process.
 Since work in process and finished goods inventory maintained by
the organization are assumed to be minimal, labor and overhead
are directly accumulated in cost of goods sold account.
 At the end of the period, labor and overhead costs for unsold or
uncompleted items are “backed out” and included in the finished
goods or work in process account.
 For this reason, JIT costing is referred to as backflush costing.
Backflushing

 Also known as backflush costing or backflush accounting.

 It is a shortened version of the traditional method of accounting for cost.
 Backflush costing eliminates some of the accounting steps under the
traditional costing and some of the general ledger accounts are combined
into one.
 Under backflush costing some or all elements of the cost of output are
determined only after the production is completed.
Traditional Costing vs. JIT Costing

 Instead of using separate accounts for Material and Work in Process as in

traditional costing, JIT costing combines these into a raw and in process
account

Materials
Inventory Raw and In
Process
Work in Process
Inventory
Traditional Costing vs. JIT Costing

 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 a Cost of Goods Sold Account.
 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.
 Traditional Manufacturing Cost Flow

Direct
Materials

Direct Work in Finished Cost of

Labor Process Goods Goods Sold

Factory
Overhead
 JIT Accounting Cost Flow

Direct Materials Direct Labor

Costs and Overhead
Costs

Work in Finished Cost of

Process Goods Goods Sold

Labor and
Overhead Costs
Labor and relating to unsold
Overhead Costs units
relating to
uncompleted units
 To compare JIT costing with traditional costing, assume that TRAMS CO.
manufactures cellular telephones and uses a JIT production system. The ff.
transactions occurred during January.
a. Trams purchased ₱170,000 of raw materials
b. All materials purchased were requisitioned for production
c. Trams incurred direct labor costs of ₱80,000
d. Actual factory overhead costs amounted to ₱122,000
e. Trams applied conversion costs total of ₱202,000 (including direct labor
cost of ₱80,000)
f. All telephones were completed and sold.
 Traditional Costing JIT Costing

a. Materials ₱170,000 a. Raw and

Accounts Payable ₱170,000 in Process ₱170,000
b. Work in Process 170,000 Accounts Payable ₱170,000
Materials 170,000 c. Conversion Cost 80,000
c. Work in Process 80,000 Accrued Payroll 80,000
Accrued Payroll 80,000 d. Conversion Cost 122,000
d. Factory Overhead 122,000 Misc. Accounts 122,000
Misc. Accounts 122,000 e. Work in Process 122,000
e. Work in Process 122,000 Factory Overhead 122,000
Factory Overhead 122,000 f. Cost of Goods Sold 372,000
f. Finished Goods 372,000 Raw and In Process 170,000
Work in Process 372,000 Conversion Cost 202,000
Cost of Goods Sold 372,000
Finished Goods 372,000
 Assume that Wilkins Company uses JIT costing for the production of goods during the month of January. The ff.
transactions summarize the major steps in Wilkins’ production during the month of January.

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

Raw and in Process 4,000

Accounts Payable 4000
to record product costs

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

Cost of Goods Sold 18,200

Wages Payable 10,400
Factory Overhead Control 7,800
to record product costs
 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:
Direct Materials ₱1,500
Direct Labor 1,200
Overhead 900

In addition, assume that finished goods inventory at January 31 was ₱6,500

consisting of:
Direct Materials ₱1,500
Direct Labor 2,850
Overhead 2,150
3. Finished Goods ₱2,500
Raw and in process ₱2,500
to record transfer 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 2,500

Less: Materials in FG, end 1,500
Amount to be backflushed 1,000
4. 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
Labor cost- Raw and in process 900
Total to be adjusted 2,100

For raw and in process:

Labor cost- Finished Goods 2,850
Labor cost- Finished Goods 2,150
Total to be adjusted 5,000