EECA ProcessCostingJIT

8/3/2019 EECA ProcessCostingJIT

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PROCESS COSTING IN

JIT SYSTEM (BACKFLUSHCOSTING)

ANKUR CHOURAGADE09IM3017


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WHAT IS BACKFLUSH COSTING?

Non-traditional type of costing that

complements just-in time inventory

Based on the philosophy that inventory is a

not a value adding activity

Method of costing a product that works

backwards: Standard costs are allocated to

finished products on the basis of the output


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Costs are flushed back through theproduction process to the point at whichinventories remain

Avoids detailed transactions as no separateaccounts for W.I.P.

In backflush costing, first focus is on the

output of the organization and it worksbackward to allocate costs between costs ofgoods sold and inventories.

KEY FEATURES


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COMPARISON

TRADITIONAL

Sequential Tracking

Recording of journal entries

follow the same order in

which the four stages of

purchases of materials,W.I.P., finished goods and

sales take place

BACKFLUSH

Does not track costs in

order

Delay in recording of certain

costs

Absence of WIP account


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BACKFLUSH COSTING

Materials

Inventory

Manufacturing

Overhead

Direct

Labor

Direct

Materials

Work in Process

Inventory

Finished Goods

Inventory

Cost of

Goods Sold

Conversion

Costs (Direct

Labor &

Manufacturing

Overhead)

Direct

Materials

Raw & Work in Process

Inventory

Finished Goods

Inventory

Cost of

Goods Sold

TRADITIONAL COSTING


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Each trigger point refers to a point at

which costs are recognized within thecost accounts and thus associated with

products

Trigger Points


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STAGES

Stage A:

Purchase ofdirect materials

Stage B:

Production resultingin work in process

Stage C:Completion of good

units of product

Stage D:Sale of

finished goods


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Trigger Points

Assume trigger points A,C and D.

This company would have two inventory accounts:

Type

1. Combined materials

and materials in workin process inventory

2. Finished goods

Account Title

1. Inventory:

Raw and In-processControl

2. Finished Goods Control


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The manufacturing cost information for March

for a division of XYZ Company:

Backflush Costing Example

COST INCURRED INMARCH

$ (THOUSANDS)

Purchase of Raw

Materials

4250

Labour 2800

Overheads 1640


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Example Contd.

ACTIVITY IN MARCH UNITS (THOUSANDS)

Finished Goods Manufactured 180

Sales 145

.

STANDARD COST/UNIT $

Materials 20

Labour 15

Overhead 9

Total 44


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Trigger Points

Journal entry for trigger point A :

Inventory: Raw and In-process Control 4250

Accounts Payable 4250

To record direct material purchased during the period


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Trigger Points

Journal entry to record conversion costs?

Conversion Costs Account 4440Cash (Labour) 2800

Cash (Overhead) 1640

To record the incurrence of conversion costs during

the accounting period


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Trigger Points

Journal entry for trigger point C :

Finished Goods (180*44) 7920Inventory: Raw and

In-Process Control(180*20) 3600

Conversion Costs (180*24) 4320

To record the cost of goods completed during the

accounting period


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Trigger Points

Journal entry for trigger point D :

Cost of Goods Sold 6380Finished Goods Control 6380

To record the cost of goods sold during theaccounting period


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SUMMARY

Inventory: Raw and In-process 4250

Accounts Payable 4250

Conversion Costs Account 4440

Cash 2800

Cash/ Creditor 1640

Cost of Goods Sold 6380Finished Goods Control 6380

Finished Goods (180*44) 7920

Inventory (180*44) 3600

Conversion Costs (180*44) 4320

DEBTORS CREDITORS

The stock balances at the end of March would be

Raw and in process materials 650

Finished goods 1,540

2,190


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Most appropriate when used to complement a

just-in-time inventory management system

This is due to the fact that back flush costingsimplifies the costing process in these situations

Backflush accounting is inappropriate whenproduction process is long and this has been

attributed as a major flaw in the design of the

concept.

When appropriate?


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ADVANTAGES

Less entries have to be passed so it saves time. (major

benefit)

Less costly as less documentation have to be

maintained.

It uses JIT environment which saves holding cost of

inventory

Provides reasonably accurate results if:

1. Material Inventories are low

2. Production Cycle times are short


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DISADVANTAGES

One of the main disadvantages of the system is thatit only works under some quite strict requirements

Standard costs must be reliably estimated and

variances kept to a minimum

Build up of work in progress or finished goods needs

to be avoided

Detailed information for management purposes may

not be available where needed, and the production

control therefore need to be all the stronger.


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THANK YOU

EECA ProcessCostingJIT

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