Just-In-Time (JIT) and Backflush Accounting

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

Just-In-Time System
- Raw materials are received just in time to go into production
- Manufactured parts are completed just in time to be assembled into products
- 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 manufacturing is characterized by decisions made by companies to intentionally maintain relatively small inventory
levels.

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 line 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-generated 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 goods 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 all of the machines in a
manufacturing cell, workers must also be able to perform routine maintenance on these machines.

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 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 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, 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.

Illustrative Problem
Communication Company manufactures cellular phones and uses a JIT production system.
The following transactions occurred during January:
a. Purchased 170,000 of raw materials
b. All materials purchased were requisitioned for production
c. Incurred direct labor costs of 80,000
d. Actual factory overhead costs amounted to 122,000
e. Applied conversion costs total 202,000 (including direct labor costs of 80,000)
f. All cellular phones were completed and sold
The transactions would be recorded as follows:
Traditional Costing System JIT Costing System
a. Materials 170,000 Raw and In Process 170,000
Accounts Payable 170,000 Accounts Payable 170,000

b. Work in Process 170,000

Materials 170,000

c. Work in Process 80,000 Conversion Cost 80,000

Accrued Payroll 80,000 Accrued Payroll 80,000

d. Factory Overhead 122,000 Conversion Cost 122,000

Miscellaneous Accounts 122,000 Miscellaneous Accounts 122,000

e. Work in Process 122,000

Factory Overhead 122,000

f. Finished Goods 372,000 Cost of Goods Sold 372,000

Work in Process 372,000 Raw and In Process 170,000
Conversion Cost 202,000
Cost of Goods Sold 372,000
Finished Goods 372,000

Illustrative Problem
Wilkins Company uses JIT costing for the production of goods during the month of January.
The following transactions summarize the major steps
in Wilkins’ production during the month of January:
1. Raw materials received from suppliers amounted to 4,000.

2. Direct labor costs of 10,400 and overhead costs of 7,800 were incurred and applied,
respectively, during the month of January.

3. 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

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

3. Finished Goods 2,500

Raw and In Process 2,500

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

Materials costs of units completed 2,500

Less: Materials in finished goods 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

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
- 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 tracking 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 and 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.