COST ACCOUNTING (GUERRERO) Just-in-time manufacturing is a production system in which each component in a production line is produced immediately as needed by the next step in the production line. OBJECTIVES OF JIT MANUFACTURING PRIMARY OBJECTIVE: To minimize if not totally eliminates all manufacturing inventories. JIT manufacturing systems aim to simultaneously 1. meet customer demand in a timely way 2. with high-quality products 3. at the lowest possible total cost FEATURES OF JIT MANUFACTURING -
The company must have dependable suppliers who are willing to deliver on short notice exact quantities of raw materials according to precise quality specifications (even including multiple deliveries within the same day). Suppliers must also be willing to deliver the raw materials, at a specified department rather than at a c entral receiving department.
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A grouping of all the different types of equipment used to make a given product should be made. Materials move from one machine to another, and various operations are performed in sequence. Materials handling costs are minimized,
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A multi-skilled work force must be developed. Under JIT system, one worker may have the responsibility to operate and maintain several different types of machines.
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A total quality control system must be applied throughout the manufacturing operations. Total quality control means no defect. Since only required quantities are produced under the pullthrough approach, any defects at any defects at any department will shut down operations at subsequent departments.
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The time required to get equipment, tools, and materials ready to start the production of a product (set-up time) should be reduce. The time from when an order is receive until it becomes a finished product (manufacturing-lead time) should likewise be reduced. Reducing setup time makes production in smaller batches economical, which in turn reduces the inventory levels. Reducing manufacturing lead time enables a company to respond faster to changes in customer demand.
BENEFITS OF JIT MANUFACTURING SYSTEMS MAJOR BENEFIT: To lower the costs of inventory. OTHER BENEFITS: -
Manufacturing activities are significantly reduced or eliminated.
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Product quality and faster delivery are enhanced.
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Inventory storage costs are reduced or eliminated.
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Production cost savings are realized because of t he improved flow of processing goods.
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Specific causes of rework, scrap and waste are reduced if not totally e liminated.
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Materials and work in process inventory accounts are eliminated. In place of these accounts only one account is used, Materials and In Process (MIP) also called Raw and In Process (RIP) account.
Backflush costing To compliment JIT manufacturing system a simplified procedures is used to allocate costs betwee n the cost of sales and inventories. This simplified procedure is known as backflush costing. Usually cost are tracked sequentially as products pass through t hese four stages in a cycle from purchase of direct materials to sale of finished goods:
Stage 2 Stage 1 Purchase of raw materials
Production resulting in Work in Process
Stage 3 Completion of Units of product
Stage 4 Sale of finished Goods
The above sequential tracking costing has system has four trigger points, corresponding to stages 1, 2, 3, and 4. Trigger points refer to a stage in the cycle from purchase of raw materials (stage 1) to sale of goods (stage 4) at which journal entries are made in the accounting system. An alternative approach to sequential tracking is backflush costing. Backflush costing is a costing procedure that omits recording some or all of the journal entries relating to the cycle from purchase of raw materials to the sale of finished goods. When journal entries for one or more stages in the cycle are omitted, the journal
entries for subsequent stage used normal or st andard costs to work backward in order t o flush out the costs in the cycle where journal entries were omitted. No se parate accounting for work in process is made. Actual conversion costs are recorded as incurred, similarly as that under the conventional recording system. Conversion costs are then applied to products at various trigger points. It is assumed that any conversion costs not applied to products are car ried forward and disposed of at year end. The following cases will illustrate backflush costing. They differ in the number and placement of trigger points.
Trigger Points
Inventory accounts
Main features
Case 1 Stage 1. Purchase of raw materials Stage 3. Completion of finished goods Stage 4. Sale of finished goods Materials and In process inventory Finished Goods Inventory Three trigger points Use of combined Materials and In Process inventory account (MIP)
Case 2 Stage 1. Purchase of raw materials
Case 3
Stage 3. Completion of finished goods Stage 4. Sale of finished goods Materials inventory Finished Goods Inventory Two trigger points No finished goods inventory account.
No materials inventory account.
Take note that in all the three cases, there are no journal entries to record work in process (stage 2) because JIT manufacturing leads to large reduction in work in process.
COMPREHENSIVE ILLUSTRATIONS
The following data for Cookie Manufacturing Company will be used to illustrate the backflush costing:
Materials purchased on credit
195,000
Actual conversion cost incurred
126,000
Number of units manufactured
10,000 units
Number of finished units sold
9,900 units
Standard cost per units: Materials
19
Conversion costs
12
There are no beginning inventories for raw materials. Any underapplied or overapplied conversion costs are adjusted to cost of goods sold at the end of the period
Case 1: Trigger points at purchase of direct materials (Stage 1), completion of goods (Stage 3), and sale of finished goods. (Stage 4)
Trigger point 1 occurs when materials are purchased. These cost are charged to Materials and In Process Inventory account (MIP). Actual conversion costs (labor and overhead) are recorded as incurred and charged to Conversion Costs Control account. Conversion costs are applied to products at trigger point 2 – transfer of units to Finished Goods Inventory account. Trigger point 3 occurs at the time finished goods are sold. The following are the accounting procedures to allocate costs to units sold and to inventories. 1.
Record materials purchased during the period. a. Materials and In Process Inventory
195,000
Accounts Payable 2.
195,000
Record conversion costs incurred during the per iod. b. Conversion Cost Control
126,000
Various Accounts 3.
126,000
Determine the number of units manufactured during the period. 10,000 goods units were manufactured during the period
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Compute the normal or standard costs per finished unit. The standard cost per unit is P31 (P19 direct materials + P12 conversion cost)
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Record the standard cost of goods sold during the period.
c. Finished Goods Inventory
310,000
Materials and In Process Inventory
190,000
Applied Conversion Cost
120,000
The fifth procedure gives backflush costing its name. Note that costs have not been recorded sequentially with the flow of product along its production route through work in process and finished goods. Instead, the output trigger point reaches back and pulls the standard direct materials cost from Materials and In Process Inventory and the standard conversion cost for manufacturing the finished goods. 6.
Record the standard cost of goods sold during the period. d. Cost of Goods Sold
306,000
Finished Goods Inventory 7.
306,000
Record the underapplied or underapplied conversion costs. d. Applied Conversion cost Cost of Goods Sold
120,000 6,000
Coversion Cost Control
126,000
At the end of the period, the ending inventory balances are:
Materials and In Process Inventory
(195,000 – 190,000)
5000
Finished Goods Inventory
(310,000 – 306,900)
3100
Total
8100
