BACKFLUSH COSTING SYSTEM

1-4. Naruto Corporation produces Valentine’s Day merchandise. It uses Just In Time production
system which lead to backflush costing system with three trigger points:

• Purchase of direct materials and incurring of conversion costs.

• Completion of good finished units of product.
• Sale of finished goods.
There are no beginning inventories of materials or finished goods and no beginning or ending
work-in process inventories. Naruto Corporation produced 36,600 finished units in July 2023 and
sold 36,000 units. The following data are for July 2023:
• Direct materials purchased 3,200,000
• Direct materials used 3,050,000
• Conversion costs incurred 799,600
• Conversion costs allocated 825,000
Required:
1. Prepare summary of journal entries for July (with disposing of under or overallocated
conversion costs to COGS.
Trigger 1 Record purchases of direct materials
Materials and In-process Inventory Control 3,200,000
Accounts Payable 3,200,000
Record conversion cost incurred
Conversion Cost Control 799,600
Various Accounts 799,600
Trigger 2 Record cost of good finished units completed
Finished Goods Control 3,875,000
Materials and In-process Inventory Control 3,050,000
Conversion Costs Allocated 825,000
Trigger 3 Record cost of finished goods sold
Cost of Goods Sold (36,000/36,600x3,875,000) 3,811,475.41
Finished Goods Control 3,811,475.41
Record underallocated or overallocated
conversion costs
Conversion Costs Allocated 825,000
Cost of Goods Sold (825,000+799,600) 25,400
Conversion Cost Control 799,600

2. If there are only two trigger points: material purchase and sale of finished goods, prepare
summary journal entries for July.
Trigger 1 Record purchases of direct materials
Materials and In-process Inventory 3,200,000
Accounts Payable 3,200,000
Record conversion costs incurred
Conversion Costs Control 799,600
Various Accounts 799,600
Trigger 2 Record cost of good finished units
completed
NO ENTRY
Trigger 3 Record cost of finished goods sold
Cost of Goods Sold 3,811,475.41
3,000,000
 Materials and In-process Inventory
(36,000/36,600x3,050,000
Conversion Costs Allocated 811,475.4098
(36,000/36,600x825,000)
Total manufacturing cost= Direct Material
used + Conversion Costs Allocated=
3,875,000.

3. If there are only two trigger points: completion of finished good and sale of finished
goods, prepare summary journal entries for July.
Trigger 1 Record purchases of direct materials
NO ENTRY
Record conversion cost incurred
Conversion Costs Control 799,600
Various Accounts (such as Wages 799,600
Payable Control)

Trigger 2 Record cost of good finished units

completed
Finished Goods Control 3,875,000
Accounts Payable Control 3,050,000
Conversion Costs Allocated 825,000
Trigger 3 Record cost of finished goods sold
Cost of Goods Sold 3,811,475.41
(36,000/36,600x3,875,000)
Finished Goods Control 3,811,475.41

4. If there are only two trigger points: sale of finished goods, prepare summary journal
entries for July.
Trigger 1 Record purchases of direct materials
NO ENTRY
Record conversion costs incurred
Conversion Costs Control 799,600
Various Accounts 799,600
Trigger 2 Record cost of good finished units
completed
NO ENTRY
Trigger 3 Cost of Goods Sold 3,811,475.41
Accounts Payable 3,000,000
(36,000/36,600x3,050,000)
Conversion Costs Allocated 811,475.4098
(36,000/36,600x825,000)

5. The Brian Manufacturing Company uses a raw and in process (RIP) 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 cost components are estimated,
and inventory account balances are adjusted accordingly. Raw materials cost is back
flushed from RIP to Finished Goods.
 The following information is for the month of April:

Beginning balance of RIP account, including P1,400 of conversion cost 31,000

Raw materials received on credit 367,000
Ending RIP inventory per physical count, including P1,800 conversion cost estimate 33,000
Requirement: Compute the amount

Solution:
Beginning balance of RIP accounts (31,000 - 1,400) 29,600
Add: Raw Materials on Credit 367,000
Total 396,600
Less: Ending Balance of RIP Inventory per physical count ( 33,000 - 1,800) 31,200
Amount to be back flushed 365,400

6. The RMK Manufacturing Company produces only for customer order and most work is
shipped within thirty-six hours of the receipt of an order. JYD uses a raw and in process (RIP)
inventory account and expenses all conversion costs to the cost of goods sold account. Work is
shipped immediately upon completion, so there is no finished goods account. At the end of
each month, inventory is counted, its conversion cost component is estimated, and the RIP
account balance is adjusted accordingly. Raw material cost is back flushed from RIP to Cost of
goods sold. The following information is for the month of May.

Beginning balance of RIP account, including P1,300 of conversion cost 12,300

Raw materials received on credit 246,000
Conversion costs incurred during the period 247,000
Ending RIP inventory per physical count, including P2,100 conversion cost estimate 12,100

Solution:
Beginning balance of RIP accounts (12,300 - 1,300) 11,000
Add: Raw Materials on Credit 246,000
Total 257,000
Less: Ending Balance of RIP Inventory per physical count ( 12,100 - 2,100) 10,000
Amount to be back flushed 247,000

7. Entries in RIP and Finished Goods. The Lopez Manufacturing Company has a cycle time of 1.5
days, uses a Raw and In Process (RIP) 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 material cost is backflushed from RIP
to Finished Goods. The following information is for May:

Beginning balance of RIP account, including $600 of conversion cost...............................$ 5,500

Beginning balance of finished goods account, including $2,000 of
conversion cost................................................................................................................……..6,000
Raw materials received on credit..........................................................................................173,000
Ending RIP inventory per physical count, including $850 conversion
cost estimate..............................................................................................................…………6,200

Ending finished goods inventory per physical count, including $1,550

conversion cost estimate............................................................................................…………4,900

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

SOLUTION:

Raw and In Process.................................................................................................... 173,000

Accounts Payable......................................................................................……173,000

Finished Goods............................................................................................................ 172,550

Raw and In Process....................................................................................…..172,550

To backflush material cost from RIP to Finished Goods. This is a postdeduction. The calculation is:

Material in May 1 RIP balance................................................................................. $ 4,900

Material received during May.................................................................................. 173,000
$ 177,900
Material in May 31 RIP, per physical count........................................................... ……5,350
Amount to be backflushed..................................................................................... $ 172,550

Cost of Goods Sold........................................................................................ 173,200

Finished Goods..................................................................................................... 173,200

To backflush material cost from Finished Goods to Cost of Goods Sold. This is a post deduction. The
calculation is:

Material in May 1 finished goods............................................................................. $ 4,000

Material backflushed from RIP................................................................................ 172,550
$ 176,550
Material in May 31 finished goods, per physical count.......................................……..3,350
Amount to be backflushed.................................................................................… $ 173,200
Cost of Goods Sold...................................................................................................... 200
Raw and In Process.................................................................................................... 250
Finished Goods..................................................................................................... 450

Conversion cost in RIP is adjusted from $600 of May 1 to the $850 estimate at May 31. Conversion cost
in Finished Goods is adjusted from the $2,000 at May 1 to the $1,550 estimate at May 31.

8. Jane, owner of Jane Corporation, has provided the following information for transactions that
occurred during August. The Corporation uses a JIT costing system.

a. Raw materials were purchased at the cost of P950,000

b. All materials purchased were requisitioned for production.
c. Direct labor costs of P2,500,000 were incurred
d. Actual factory overhead costs amounted to P6,000,000
e. Applied conversion costs totaled P8,100,000. This included P2,500,000 of direct labor
f. All units were completed.

Compute the amount to be back flushed from RIP to Finished Goods.

Solution:
Raw materials purchased were requisitioned
For production P950,000

(No RIP beg and ending balance)

9. Using the same information in No. 2, compute the amount of Finished Goods after all transactions
have been completed.

Solution:
Amount to be back flushed from RIP to Finished Goods P950,000
Applied conversion costs to production 8,100,000
Amount of Finished Goods P9,050,000
10. Sweet N Sniff manufactures a product known as “Sweet Melody Lotion”. The transactions for the month
of March 2020 were as follows:

Purchase of raw materials P1,000,000

Labor/Wages incurred 300,000
Factory overhead incurred 400,000
Units completed 50,000 units
Units sold 49,900 units

There are no beginning inventories of raw materials, work in process and finished goods. The standard
cost per unit of output is P34.80 (P19.80 for raw materials and P15 for conversion costs, of which P6 is for labor
cost.

Required: Prepare the journal entries if:

a. Using Traditional costing
b. Back flush costing using three trigger points (purchases, completion of goods and upon sale)

Solutions: a. Traditional Costing

1. Raw Materials P1,000,000
Accounts payable P1,000,000

2. Work in Process (50,000 X P19.80) 990,000

Raw Materials 990,000

3. . Work in Process 300,000

Accrued Wages 300,000

4. Factory Overhead 400,000

Various 400,000

5. Work In process (50,000 X P9) 450,000

FOH Applied 450,000

6. Finished Goods 1,740,000

Work in Process 1,740,000

7. COGS 1,736,520
Finished Goods (49,900 X P34.80) 1,736,520

8. FOH Applied 450,000

FOH 400,000
COGS 50,000
 b. Back flush- Three Trigger Points
1. Raw in process (RIP) Inventory P1,000,000
Accounts Payable P1,000,000

2. Conversion Cost 700,000

Accrued Payroll 300,000
Various 400,000

3. Finished Goods 1,740,000

RIP Inventory 990,000
CC Applied (50,000 X P15) 750,000

4. COGS 1,736,520
Finished Goods 1,736,520

5. Overhead Applied CC 50,000

COGS 50,000

ACTIVITY BASED COSTING SYSTEM

11. The Shiffuden Corporation manufactures books and has the following budgeted data for
2023:

Estimated Estimated Driver

Overhead Totals In 2023
Set Ups 3,000,000 1,500 Set Ups
Supervision 1,000,000 40,000 Direct Labor Hours
Shipping 1,400,000 35,000

A. Calculate the overhead cost applied each overhead category.

Setups 3,000,000/1,500= 2,000 Per Set Up
Supervision 1,000,000/40,000= 25 Per Direct Labor Hour
Shipping 1,400,000/35,0000= 40 Per Order

B. Calculate the overhead applied for the following totals for 2023.

Actual Total Setups 1,450

Actual Total Direct Labor Hours 41,000
Actual Total Orders 30,300

Actual Total Setups 1,450 x 2,000 2,900,000

Actual Total Direct Labor Hours 41,000 x 25 1,025,000
Actual Total Orders 30,300 x 40 1,212,000
TOTAL 5,137,000
12. Romark Housecleaning provides housecleaning services to its clients. The company uses an
activity-based costing system for its overhead costs. The company has provided the following

data from its activity-based costing system.

Activity Cost Pool Total Cost Total Activity

Cleaning 645,576 72,000 hrs

Job Support 129,546 5,400 jobs
Client Support 20,900 760 clients
Others 110,000 Not applicable
Total 906,022

The "Other" activity cost pool consists of the costs of idle capacity and organization-

sustaining costs. One particular client, the Lopez family, requested 31 jobs during the year that

required a total of 62 hours of housecleaning. For this service, the client was charged 1,620

Required:

a. Compute the activity rates (i.e., cost per unit of activity) for the activity cost pools.

Round off all calculations to the nearest whole cent.

b. Using the activity-based costing system, compute the customer margin for the

Lopez family. Round off all calculations to the nearest whole cent.

c. Assume the company decides instead to use a traditional costing system in which

ALL costs are allocated to customers based on cleaning hours. Compute the

margin for the Lopez family. Round off all calculations to the nearest whole

cent.
 Solution for Requirement (A).
Activity Cost Pool Total Cost Total Activity Activity rates

Cleaning 645,576 72,000 hrs 8.88 per hour

Job Support 129,546 5,400 jobs 23.99 per jobs
Client Support 20,900 760 clients 27.50 per client

Solution for Requirement (B).

Clients Charges 1,620
COSTS:
Cleaning 550.56
Job Support 743.69 S
Client Support 27.5 1321.75
Customer Margin 298

Computation for costs

Cleaning 62 hours * 8.88 per hour 550.56
Job Support 31 jobs *23.99 per job 743.69
Client Support 1 client * 27.50 per client 27.5

Solution for Requirement (c).

Clients Charges 1,620

Allocated Costs 772.52
Customer Margin 847.48

62 hours * 12.46 per hour = 772.52

13. Tom would like to institute an activity-based costing system to price products. The
company’s Purchasing Department incurs costs of 550,000 per year and has six employees.

Purchasing has determined the three major activities that occur during the year.
Activity Allocation Measure No. of People Total Cost
Issuing Purchase Order No. of purchase 1 150,000
Reviewing receiving reports No. of receiving reports 2 175,000
Making Phone Calls No. of phone calls 3 225,000

During the year 50,000 phone calls were made in the department: 15,000 purchase orders

were issued; and 10,000 shipments were received. Product A required 200 phone calls,
150 receiving reports, and 50 purchase orders. Product B required 350 phone calls, 400

receiving reports, and 100 purchase orders.

a. Determine the amount of purchasing department cost that should be assigned to

each of these products.

b. Determine purchasing department cost per unit if 1,500 units of Product A and

3,000 units of Product B were manufactured during the year.

SOLUTION:

150,000/15,000 = 10 per purchase order

175,000/10,000 = 17.50 per receiving report

225,000/50,000 = 4.50 per phone call

REQUIREMENT (A)
Product A Product B
50 Purchase orders * 10 500
100 Purchase orders * 10 1000
150 Receiving Reports *17.50 2625
400 Receiving Reports *17.50 7000
200 Phone Calls * 4.50 900
350200 Phone Calls * 4.50 1575
Total Cost 4025 9575

REQUIREMENT (B)
Product A= 4,025/1,500 = 2.68 per unit
Product B= 9,575/3,000 = 3.19 per unit
 14. The MeNyou Co produces three products, A, B and C, all made from the same material. Until
now, it has used traditional absorption costing to allocate overheads to its products. The
company is now considering an activity-based costing system in the hope that it will improve
profitability, Information for the three products for the last year is as follows:
A B C
Production and sales volumes (units) 15,000 12,000 18,000
Selling price per unit 7.5 12 13
Raw Materials usage (kg) per unit 2 3 4
Machine hours per unit 0.1 0.15 0.2
Number of production runs per annum 16 12 8
Number of purchase orders per annum 24 28 42
Number of deliveries to retailers per annum 48 30 62

The price for raw materials reamained constant throughout the year at 1.20 per kg. Similarly the direct labor cost for the whole workforce
was 14.80 per hour. The annual overhead costs were as followss:

Machine set up Costs 26,550

Machine running Costs 66,400
Procurement Costs 48,000
Delivery Costs 54,320

Requirements:

a. Calculate the full cost per unit for products A. B and C under traditional absorption costing,
using direct labor hours as the basis for appointment.

b. Calculate the full cost per unit of each product using activity based costing.

Solution for requirement (A): Cost per unit under full absorption costing

Total Overhead Cost: AMOUNT

Machine Set up Costs 26,550
Machine running Costs 66,400
Procurement Costs 48,000
Delivery Costs 54,320
TOTAL 195,270

Overhead Absorption Rate:

A B C Total
Production Volume 15,000 12,000 18,000
Labor Hours per unit 0.1 0.15 0.2
Total Labor hours 1,500 1800 3600 6,900

Therefore, overhead absorption rate = 195, 270/6,900 = 28.30 per hour.

A B C
Raw Materials (1.20*2/3/4kg) 2.4 3.6 4.8
Direct Labor (14.80*0.1/0.15/0.2 hours) 1.48 2.22 2.96
Overhead 28.30*1/0.15/0.2 hours) 2.83 4.25 5.66
FULL COST PER UNIT 6.71 10.07 13.42
Solution for requirement (B): Cost per unit using ABC Costing

Cost Drivers:
Machine Set up Costs 26,550 Production runs (16+12+8) 36
Machine running Costs 66,400 Machine hours (7,500+8,400+16,200) 32,100
Procurement Costs 48,000 Purchase orders (24+48+42) 94
Delivery Costs 54,320 Deliveries (48+30+62) 140
TOTAL 195,270

Cost per machine set up (26,550/36) 737.5

Cost per machine hours (66,400/32,100) 2.0685
Cost per order (48,000/94) 510.6383
Cost per delivery (54,320/140) 388

Allocation of overhead to each product:

A B C TOTAL
Machine Set up Costs 11,800 8,850 5,900 26,550
Machine running Costs 15,514 17,375 33,510 66,400
Procurement Costs 12,255 14,298 21,447 48,000
Delivery Costs 18,624 11,640 24,056 54,320
TOTAL 58,193 52,163 84,913 195,270

Number of units Produced 15,000 12,000 18,000

Overhead Cost per unit 3.88 4.35 4.72

Cost per unit:

A B C
Materials 2.4 3.6 4.8
Labor 1.48 2.22 2.96
Overhead 3.88 4.35 4.72
7.76 10.17 12.48

15. Triple Limited makes three types of gold watch – the Diva (D), the Classic (C) and the Poser (P). A
traditional product costing system is used at present; although an activity based costing (ABC) system is
being considered. Details of the three products for a typical period are:

Hours per Unit Materials Production

Labor Hours Machine Hours Cost per Unit Units
Product D 1/2 1 1/2 20 750
Product C 1 1/2 1 12 1,250
Product P 1 3 25 7,000

Total production overheads are $654,500 and further analysis shows that the total production overheads can
be divided as follows:
%
Costs relating to set-ups 35
Costs relating to machinery 20
Costs relating to materials handling 15
Costs relating to inspection 30
Total production overhead 100
The following total activity volumes are associated with each product line for the period as a whole:
Number of set-ups Number of movements of materials Number of inspections
Product D. 75. 12 150
Product C 115 21 180
Product P 480 87 670
670 120 1,000

Direct labor costs $6 per hour and production overheads are absorbed on a machine hour basis. The
overhead absorption rate for the period is $28 per machine hour.

Required:
(a) Calculate the cost per unit for each product using traditional methods, absorbing overheads on the basis
of machine hours.

(b) Calculate the cost per unit for each product using ABC principles (work to two decimal places).

SOLUTION:

(a. ) Traditional cost per unit

D C P
Material 20 12 25
Labor ($6/hour) 3 9 6
Direct costs 23 21 31
Production overhead
($28/machine hour) 42 28 84
Total production cost/unit 65 49 115

(b. ) ABC cost per unit

(i. ) Total overheads

These were given at $654,500
(ii. ) Total machine hours (needed as the driver for machining overhead)

Product Hours/unit Production units Total hours

D 1 1/2 750 1,125
C 1 1,250 1,250
P 3 7,000 21,000
Total machine hours 23,375
(iii. ) Analysis of total overheads and cost per unit of activity

Type of Overhead Driver % Total Overhead Level of driver activity Cost/driver

Set-ups No. of set-ups 35 229,075 670 341.90
Machining Machine hours 20 130,900 23,375 5.60
Materials handling Mats. Movements 15 98,175 120 818.13
Inspection No. of inspections 30 196,350 1,000 196.35
100 654,500

(iv. ) Total overheads by product and per unit

Product D Product C Product P Total
Overhead Activity Cost $ Activity Cost $ Activity Cost $ Activity Cost $
Set-ups 75 25,643 115 39,319 480 164,113 670 229,075
Machining 1,125 6,300 1,250 7,000 21,000 117,600 23,375 130,900
Material 12 9,817 21 17,181 87 71,177 120 98,175
Handling
Inspection 150 29,453 180 35,343 670 131,554 1,000 196,350
Total 77,213 98,843 484,444 654,500
overhead
cost
Units 750 1,250 7,000
produced
Cost per $ 94.95 $ 79.07 $ 69.21
unit

(v. ) Cost per unit

D C P
Direct costs (from (a)) 23.00 21.00 31.00
Overheads (from (iv)) 94.95 79.07 69.21
117.95 100.07 100.21

16. A company makes two products using the same type of materials and skilled workers. The following
information is available.

Product A Product B
Budgeted Volume (Units) 1,000 2,000
Materials per unit 10 20
Labor per unit 5 20

Fixed costs relating to material handling amount to $100,000. The cost driver for these costs is the volume of
material purchased.

General fixed costs, absorbed on this basis of labor nouns, amount $180,000

Requirement:

Using the Activity Based Costing, what is the total fixed overhead amount to be absorbed into each unit of
product B to the nearest whole amount?
SOLUTION:
Total material budget ((1,000 units x 10) + (2,000 units x 20)) = 50,000
Fixed costs related to material handling = $100,000
OAR = 2/$ of material
Product B = 2 x 20 = 40

Total labor budget ((1,000 units x 5) + (2,000 units x 20) = 45,000

General fixed costs = $180,000
OAR = $4/$ of labor
Product B = 4 x 20 = 80
Total fixed overhead cost per unit of Product B (40 + 80) = 120

17-20. A company manufactures conference tables and follows ABC to absorbs overhead. The
company has chosen the following cost pools and cost drivers for the production overhead:

ADDITIONAL INFORMATION:

o The company receives a special order of 20 conference tables that requires the
following number of support activities.

o Number of machines set ups: 60, number of production order: 25, number of machine
hours:400, number of parts to be repaired: 50

o Direct material Cost per unit-4000, direct wages per unit: 2500, Direct expense per
unit-Rs1,000

Requirements:

1. Compute the overhead rate for each cost driver

1. Cost driver rate

Main Actiivity Cost Pool Prodcution Overhead Cost Driver Quantity Cost Driver Rate
Machine set up 400,000 5,000 set ups 80 per set up
Production orders 100,000 200 orders 500 per order
Machine maintenance 160,000 4000 hours 40 per hour
Parts Repairs 240,000 8000 hours 30 per hour

2. How much production overhead would be charged to this order?

2. Production Overhed to be charge to speacial order

Machine set up 4,800

Production orders 12,500
Machine maintenance 16,000
Parts Repairs 1,500
Production Overhead to be charge 34,800
3. Compute the factory cost for this order.

3. Factory costs for order (20 conference tables)

Direct Materials 80,000

Direct Wages 50,000
Direct Expenses 20,000
Prime Cost 150,000
Add: Production Overhead 34,800
Factory Cost 184,800