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8/3/2019 EECA ProcessCostingJIT
1/19
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