Just-in-Time and

Backflush Costing

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 1

Differentiate materials
requirements planning (MRP)
systems from just-in-time (JIT)
systems for manufacturing.

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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 1

 Materials Requirement
Planning (MRP)

Materials requirements planning (MRP)

systems take a “push-through” approach
that manufactures finished goods for
inventory on the basis of demand forecasts.
MRP predetermines the necessary outputs
at each stage of production.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 3

Materials Requirement
Planning (MRP)
Management accountants play key roles in
an MRP system, including...
– maintaining accurate and timely information
pertaining to materials, work in process,
and finished goods, and...
– providing estimates of the setup costs for each
production run, the downtime costs,
and carrying costs of inventory.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 4

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 2

 Just-In-Time Production Systems

Just-in-time (JIT) production systems take a

“demand pull” approach in which goods are
only manufactured to satisfy customer orders.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 5

Major Features of a JIT System

1. Organizing production in manufacturing cells

2. Hiring and retaining multi-skilled workers
3. Emphasizing total quality management
4. Reducing manufacturing lead time and setup time
5. Building strong supplier relationships

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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 3

 Major Features of a JIT System
What information may management accountants use?

Personal observation by production

line workers and managers
Financial performance measures,
such as inventory turnover ratios
Nonfinancial performance measures
of time, inventory, and quality.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 7

Backflush Costing

Backflush costing describes a costing

system that delays recording some or
all of the journal entries relating to the
cycle from purchase of direct materials
to the sale of finished goods.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 8

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 4

 Backflush Costing

Where journal entries for one or more stages

in the cycle are omitted, the journal entries
for a subsequent stage use normal or standard
costs to work backward to flush out the costs in
the cycle for which journal entries were not made.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 9

Trigger Points

The term trigger point refers to a stage in a cycle

going from purchase of direct materials to sale
of finished goods at which journal entries are
made in the accounting system.

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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 5

 Trigger Points

Stage A: Stage B:
Purchase of Production resulting
direct materials in work in process

Stage C: Stage D:
Completion of good Sale of
units of product finished goods
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 11

Trigger Points

Assume trigger points A, C, and D.

This company would have two inventory accounts:

Type Account Title

1. Combined materials 1. Inventory:
and materials in work Raw and In-process
in process inventory Control
2. Finished goods 2. Finished Goods Control
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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 6

 Trigger Points

What is the journal entry when trigger point A occurs?

Inventory: Raw and In-process Control XX
Accounts Payable Control XX
To record direct material purchased during the period

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Trigger Points

What is the journal entry to record conversion costs?

Conversion Costs Control XX
Various accounts XX
To record the incurrence of conversion costs during
the accounting period
Underallocated or overallocated conversion costs
are written off to cost of goods sold.
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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 7

 Trigger Points

What is the journal entry when trigger point C occurs?

Finished Goods Control XX
Inventory: Raw and
In-Process Control XX
Conversion Costs Allocated XX
To record the cost of goods completed during the
accounting period
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 15

Trigger Points

What is the journal entry when trigger point D occurs?

Cost of Goods Sold XX
Finished Goods Control XX
To record the cost of goods sold during the
accounting period

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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 8

 Trigger Points

Assume trigger points A and D.

This company would have one inventory account:

Type Account Title

Combines direct materials
inventory and any direct Inventory Control
materials in work in process
and finished goods inventories
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 17

Trigger Points

What is the journal entry when trigger point A occurs?

Inventory: Raw and In-process Control XX
Accounts Payable Control XX
To record direct material purchased during the period
Same as the A, C, and D example.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 18

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 9

 Trigger Points

What is the journal entry to record conversion costs?

Conversion Costs Control XX
Various accounts XX
To record the incurrence of conversion costs during
the accounting period
Same as the A, C, and D example.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 19

Trigger Points
What is the journal entry to record the
cost of goods completed during the
accounting period (trigger point C)?
No journal entry.

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©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 10

 Trigger Points

What is the journal entry when trigger point D occurs?

Cost of Goods Sold XX
Inventory Control XX
Conversion Costs Allocated XX
To record the cost of goods sold during the
accounting period

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 21

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 20 - 11