CHAPTER 6 JUST-IN-TIME AND BACKFLUSH ACCOUNTING

LEARNING OBJECTIVES:
UPON COMPLETION OF THIS CHAPTER, YOU SHOULD BE ABLE TO
• UNDERSTAND THE JIT PHILOSOPHY
• KNOW AND UNDERSTAND THE FIVE KEY ELEMENTS INVOLVED IN THE
OPERATION OF JIT SYSTEM
• DIFFERENTIATE THE JIT SYSTEM FROM THE TRADITIONAL COSTING
SYSTEM
• 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 MANUFACTURING PHILOSOPHY ORIGINATED IN JAPAN (PRIMARILY
BY TOYOTA AND KAWASAKI) AND IS BEING INCREASINGLY UTILIZED BY
AMERICAN MANUFACTURING COMPANIES.
• JIT MANUFACTURING IS CHARACTERIZED BY DECISIONS MADE BY
CONPANIES TO INTENTIONALLY MAINTAIN RELATIVELY 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 FOR THE RECEIPT OF CUSTOMER ORDERS
BEFORE BEGINNING PRODUCTION SUCH AS: CUSTOM FURNITURE
MANUFACTURERS, CUSTOM SHIPBUILDERS AND CUSTOM
HOMEBUILDERS.
• THE DISTINGUISHING CHARACTERISTICS OF OF JIT COSTING IS THAT
PRODUCTION COSTS ARE ACCUMULATED WITH INVENTORY AT LATER
STAGES OF THE PRODUCTION PROCESS. THE RATIONALE FOR THE
THIS DIFFERENCE IS THAT JIT ASSUMES THAT SMALL (IF ANY)
QUANTITIES OF DIRECT MATERIALS, WORK-IN-PROCESS, AND
FINISHED GOODS INVENTORIES WILL BE MAINTAINED.
• SINCE JIT ASSUMES THAT THE WORK-IN-PROCESS AND FINISHED
GOODS INVENTORY MAINTAINED BY THE ORGANIZATIONWILL 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. 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 SYSTEMS (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.
4. A COMPANY MUST DEVELOP A SYSTEM OF TOTAL QUALITY CONTROL
(TQC) OVER IS 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
THEUARE SHIPPED TO ESURE TAT THE GOODS ARE FREE OF DEFECTS.
 THE COMPANY’S OWN EMPLOYEES ARE RESPONSIBLE TO INSPECT
THEIR OWN WORK BEFORE SENDING PARTIALLY COMPLETED UNITS
TO THE NEXT WORKSTATION.
5. A COMPANY MUST DEVELOP A FLEXBLE WORK FORCE. 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 OPOERATE ALL OF THE MACHINES IN A
MANUFACTURING CELL, WORKERS MUST ALSO BE ABLE TO
PERFORM ROUTINE MAINTAINTAINED ON THESE MACHINES.

AN INDIVIDUAL FIRM IN THE PRESENT ENVIRONMENT CAN

• BY CAREFUL SCHEDULING OR 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.

JUST-IN-TIME (JIT) COSTING DIFFERS FROM TRADITIONAL COSTING

WITH REGARDS TO THE ACCOUNTS USED AND THE TIMING OF COST
RECORDING. THERE ARE BASICALLY THREE MAJOR DIFFERENCES.
1. INSTEAD OF USING SEPRATE ACCOUNTS FOR MATERIAL AND WORK
IN PROCESS AS IN TRADITIONAL COSTING, JIT COSTING COMBINES
THESE INTO A 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 ACCOUNT.
3. IN TRADITIONAL COSTING, OVEREAD 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.
SUMMARY OF COST FLOWS IN JIT COSTING

DIRECT MATERIALS DIRECT LABOR AND

COSTS OVERHEAD COSTS

WORK IN PROCESS FINISHED GOODS COST OF GOODS

INVENTORY INVENTORY SOLD

LABOR AND OVERHEAD

COSTS RELATING TO
UNSOLD UNITS
LABOR AND OVERHEAD
COSTS RELATING TO
UNCOMPLETED UNITS
 TO COMPARE JIT COSTING WITH TRADITIONAL COSTING, ASSUME
TRAMS CO. MANUFACTURES CELLUAR TELEPHONES AND USES A JIT
PRODUCTION OCCURRED DURING JANUARY.
A. TRAMS PURCHASED P170,000 OF RAW MATERIALS.
TRADITIONAL COSTING JUST-IN-TIME COSTING
MATERIALS 170 RAW IN PROCESS 170
A/P 170 A/P 170

B. ALL MATERIALS PURCHASED WERE REQUISITIONED FOR PRODUCTION.

WORK IN PROCESS 170
MATERIALS 170

C. TRAMS INCURRED DIRECT LABOR COSTS OF P80,000.

WORK IN PROCESS 80 CONVERSION COST 170
ACCRUED PAYROLL 80 ACCURED PAYROLL 170
D. ACTUAL FACTORY OVERHEAD COSTS AMOUNTED TO P122,000
FACTORY OVERHEAD 122 CONVERSION COSTS 122
MISCELLANEOUS ACCTS 122 MISC ACCTS 122

E. TRAMS APPLIED CONVERSION COSTS TOTAL P202,000 (INCLUDING DIRECT

LABOR COST OF P80,000.
WORK IN PROCESS 122
FACTORY OVERHEAD 122

F. ALL TELEPHONES WERE COMPLETED AND SOLD.

FINISHED GOODS 372
WORK IN PROCESS 372

COST OF GOODS SOLD 372 COST OF GOODS SOLD 372

FINISHED GOODS 372 RAW AND IN PROCESS 170
COVERSION COST 202
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
WILKIN’S PRODUCTION FOR JANUARY:
1. RAW MATERIALS RECEIVED FROM SUPPLIERS AMOUNTED TO P4,000.
RAW AND IN PROCESS 4,000
ACCOUNTS PAYABLE 4,000
To record product costs.
2. DIRECT LABOR COSTS OF P10,000 AND OVERHEAD COSTS OF P7,800
WERE INCURRED AND APPLIED.
COST OF GOODS SOLD 18,200
WAGES PAYABLE 10,400
FACTORY OVERHEAD CONTROL 7,800
3. THE COST OF WORK-IN-PROCESS AT JANUARY 31 WAS P3,600. THIS COST WAS
DETERMINED THROUGH THE PRODUCTION REPORT AND IS COMPOSED OF THE
FOLLOWING ELEMENTS:
FINISHED GOODS 2,500
RAW AND IN PROCESS 2,500
To record transfer of cost of units completed.
Materials received 4,000
less: Matls in RIP 1,500
Amount to be backflushed 2,500

IN ADDITION, ASSUME THAT FINISHED GOODS INVENTORY AT JAN 31, WAS

P6,500 CONSISTING OF:
Direct materials P1,500
Direct labor 2,850
Overhead 2,150
4. COST OF GOODS SOLD 1,000
FINISHED GOODS 1,000
To record transfer of units sold.
Materials cost units comp 2,500
Less: Matls 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: For Finished goods:
Labor cost—raw and in process 1,200 Labor cost—finished goods 2,850
Overhead—raw and in process 900 Overhead—finished goods 2,150
Total to be adjusted 2,100 Total to be adjusted 5,000
BACKFLUSHING
BACKFLUSHING IS ALSO KNOWN AS BACKFLUSH COSTING. IT IS A
SHORTERNED 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 WORK IN
PROCESS BECOMES IMPRACTICAL.
• 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 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. DETAILED SUBSIDIARY RECORDS ARE
NOT MAINTAINED OF UNITS IN PROCESS.
• BACKFLUSH COSTING ELIMINATES SOME FO THE ACCOUNTING STEPS
UNDER TRADITIONAL COSTING AND SOME OF THE GENERAL LEDGER
ACCOUNTS ARE COMBINED INTO ONE.
• UNDER JOB ORDER COSTING AND PROCESS COSTING, THE COST OF
THE COMPLETED UNITS IS DETERMINED BY ASSIGNING THE THREE
ELEMENTS OF COST—DIRECT MATERIALS, DIRECT LABOR, AND
FACTORY OVERHEAD—TO THE WORK IN PROCESS 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.