CHAPTER 5

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 a 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. The JIT manufacturing philosophy
originated in Japan (primarily by Toyota and Kawasaki) and is being increasingly utilized by American manufacturing companies.

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 are expected to move through factory in such a way that goods come out of one operation just in time to be
processed in the next operation. JIT calls also for the transfer of finished goods directly to the vehicles used to deliver them to customers,
rather than to storage. Such arrangement completely eliminates the need for the warehouse space that has been considered an expensive
part of any manufacturing operation. It also reduces the cost of handling, from the point of delivery of raw materials to the point where
the finished product is shipped to the customer. Goods would be handled less often and the smaller quantities involved might eliminate
the need for expensive bulk-moving equipment (such as forklifts).
JIT manufacturing is characterized by decisions made by companies to intentionally maintain relatively small 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 wait for
the receipt of customer orders before beginning production such as : custom furniture manufacturers, custom shipbuilders and custom
homebuilders.
The distinguishing characteristic of JIT costing is that production costs are accumulated with inventory at later stages of production
process. The rationale for 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 organization will 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 “basked out” and included in either finished goods or work-in-process, respectively.
For this reason, JIT costing is often referred to as backflush costing. There are 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 system (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 its 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 before they are shipped to
ensure that the goods are free of defects. The company’s own employees are responsible to inspect their own work before
sending partially completed units on to the next workstation.
5. A company must develop a flexible 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 operate the machines in a manufacturing cell, workers must
also be able to perform routine maintenance on these machines.

An individual firm in the present environment can, by careful scheduling of 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 separate accounts for Materials and Work in Process as in tradition 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 usually charged to a Conversion Cost account or sometimes direct to Cost of Goods Sold account.
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 production is completed.

To compare JIT costing with traditional costing, assume that TRAMS Co. manufactures cellular telephones and uses a JIT production
system. The following transactions occurred during January.

a. Trams purchased P170,000 of raw materials.

b. All materials purchased were requisitioned for production
c. Trams incurred direct labor costs of P80,000
d. Actual factory overhead costs amounted to P122,000
e. Trams applied conversion costs total P202,000 (including Direct labor cost of P80,000)
f. All telephones were completed and sold.

The transactions would be recorded in a traditional costing system as follows:

A. Materials 170,000
Accounts payable 170,000

B. Work in Process 170,000

Materials 170,000

C. Work in Process 80,000

Accrued payroll 80,000

D. Factory overhead 122,000

Miscellaneous accounts 122,000

E. Work in Process 122,000

Factory overhead 122,000

F. Finished Goods 372,000

Work in Process 372,000

Cost of Goods Sold 372,000

Finished goods 372,000

The general ledger (T-accounts) will appear as follows:

Materials Work in Process
a) 170,000 b) 170,000 b) 170,000 f) 372,000
c) 80,000
e) 122,000

Finished goods Factory Overhead

f) 372,000 f) 372,000 d) 122,000 e) 122,000

Accrued Payroll Cost of Goods Sold

c) 80,000 f) 372,000
 Under JIT costing, no entries are made for transaction b, c, and e. entry b is not necessary because the placement of materials
into production is implied in transaction (a) when materials are first received. No separate entry is made for (c) because direct labor is
combined with factory overhead and maybe debited first to conversion cost or maybe debited direct to cost of goods sold.

The JIT costing system would record the January transactions in the following manner.

A. Raw and In process 170,000

Accounts payable 170,000

C. Conversion cost 80,000

Accrued payroll 80,000

D. Conversion cost 122,000

Miscellaneous accounts 122,000

F. Cost of goods sold 372,000

Raw and In process 170,000
Conversion cost 202,000

The general ledger (T-accounts) will appear as follows:

Raw and in process Conversion cost
a) 170,000 f) 170,000 d) 202,000 f) 202,000

Cost of Goods Sold Wages payable

f) 372,000 f) 80,000

SUMMARY OF COST FLOWS IN JIT COSTING

Direct materials costs Direct labor and overhead costs

Work in process Finished goods Cost of goods sold

inventory inventory

Labor and overhead

costs relating to unsold
units

Labor and overhead

costs relating to
uncompleted units

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 during the month of January.
1. Raw materials received from suppliers amounted to P4,000.
2. Direct labor costs of P10,400 and overhead costs of P7,800 were incurred and applied, respectively during the month of
January.
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:
Direct materials 1,500
Direct labor 1,200
Overhead 900

In addition, assume that finished goods inventory at January 31 was P6,500, consisting of:
Direct materials 1,500
Direct labor 2,850
Overhead 2,150

The journal entries under JIT costing are shown below:

1. Raw and In process 4,000

Accounts payable 4,000

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 the transfer of cost of units completed

Materials received 4,000

Less: Mat. 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 comp 2,500

Less: Mat. 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:

Labor cost – raw and in process 1,200
Overhead – raw and 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
Backflushing
Backflushing is also known as backflush costing or backflush accounting. It is a shortened 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 WIP 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 tacking of the cost of work in
process. Under 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 of the accounting steps under traditional costing and some of the general ledger accounts are
combined into one. Example will be the materials account and work in process account which are combined into one account – Raw
and In Process. Raw materials received are put immediately into production so materials and work in process are combined in a single
account.

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.

TRUE OR FALSE

1. One purpose of a JIT inventory system is to have goods ready just when the customer needs them.
2. Under JIT, materials are “pushed” from one workstation to another to ensure timely completion of finished products.
3. A company will typically have fewer suppliers under JIT than a conventional system.
4. For JIT to operate successfully, all similar pieces of equipment (such as lathers or drill presses) must be grouped together.
5. One way to reduce inventories is to reduce the setup time needed between production runs.
6. The most effective way to achieve total quality control is to have an Inspection Department that inspects all incoming raw
materials, and inspects goods as they move along the product flow line.
7. In a JIT environment, workers are expected to be cross-trained and work as a team.
8. Under JIT, process time and queue time would be both considered value-added activities.
9. The time involved in changing equipment and getting jigs and forms in place to accommodate the production of a different
item is known as setup time.
10. The workforce under JIT has less responsibility for quality control than in a conventional system.