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Cost Accounting Chap 5

Just-in-Time (JIT) is a production strategy that focuses on receiving materials only when they are needed, reducing inventory and storage costs. Backflush Costing is a simplified method of tracking production costs in a JIT environment, where costs are calculated after the product is completed rather than at each step. This approach enhances efficiency, responsiveness, and minimizes waste by ensuring that production aligns closely with customer demand.

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9 views2 pages

Cost Accounting Chap 5

Just-in-Time (JIT) is a production strategy that focuses on receiving materials only when they are needed, reducing inventory and storage costs. Backflush Costing is a simplified method of tracking production costs in a JIT environment, where costs are calculated after the product is completed rather than at each step. This approach enhances efficiency, responsiveness, and minimizes waste by ensuring that production aligns closely with customer demand.

Uploaded by

christinejeashid11
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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What is Just-in-Time (JIT)?

Imagine a restaurant that only cooks food when someone orders it. They
don't prepare a lot in advance and let it sit. That's kind of like JIT. It's a way of
making things where you only get the materials and make the products
when you need them. This cuts down on storing a lot of stuff that might not
get used.

What is Backflush Costing?

This is a simplified way of tracking the costs of making things, used

with JIT. Instead of carefully tracking every little cost at each step, you wait
until the product is finished (or even sold) and then "back out" the costs.

Think of it like this:

 Traditional Costing: You carefully track every ingredient, every


minute of cooking time, every bit of electricity used, as you go.

 Backflush Costing: You wait until the dish is served, then you figure
out roughly how much everything cost.

Key Points from the Image:

 Costs are delayed: You don't track costs closely until later in the
process.

 Minimal inventory: JIT assumes you won't have much raw material,
work-in-progress, or finished goods sitting around.

 Labor and Overhead to COGS: Normally, the costs of labor and


factory overhead (like rent, utilities) are added directly to the "Cost of
Goods Sold" (COGS) account. This is the cost of the products that were
actually sold.

 "Backing Out" Costs: At the end of a period, if you do have any


unsold or unfinished items, you take some of the labor and overhead
costs out of COGS and put them into the inventory accounts.

 RIP Account: Instead of separate accounts for raw materials and


work-in-progress, they're combined into one account called "Raw and
In Process" (RIP).

 No Separate Labor Account: Direct labor costs aren't tracked


separately; they're lumped into conversion costs (along with
overhead).
 Overhead at Completion: Factory overhead isn't added to the
product until it's finished.

 Why Use Backflush Costing?


It's simpler and faster, which is good for companies using JIT because they don't have a
lot of inventory to track. It's less detailed, but in a JIT environment, the differences in
accuracy are often small.

In essence, Backflush Costing is a streamlined way to account for production costs in a JIT
setting.

What is JIT again? Remember, JIT is about making things only when you need them. It's like
ordering ingredients for a cake just before you start baking, instead of buying everything weeks
in advance.

Here's what the image says about JIT's features:


1. "Raw materials are delivered at exactly the points they are needed and just when
they are needed to initiate production."
o Simple: You get the stuff you need to make things right when you're about to
start making them. No waiting around.
2. "Eliminates the need for the warehouse."
o Simple: Because you're getting materials just in time, you don't need a big space
to store them. You can get rid of (or shrink) your warehouse.
3. "Reduces cost of handling - eliminates expensive bulk-moving equipment."
o Simple: You don't have to move tons of stuff around a warehouse because you're
only getting what you need, when you need it. This saves money on forklifts and
other moving equipment.
4. "Maintains relatively small inventory levels."
o Simple: You don't keep a lot of stuff on hand. You only have a little bit of what
you need to make things.
5. "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."
 Simple: You make things quickly and sell them quickly. You don't want products sitting
around for a long time.
6. "Wait for the receipt of customer orders before beginning production."
 Simple: You don't make anything until someone actually orders it. This way, you know
you'll have a buyer for what you're making.
In essence, JIT is about:
 Efficiency: Not wasting time, space, or money.
 Responsiveness: Making things quickly when customers want them.
 Minimizing Waste: Not having a lot of unused materials or finished products.

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