JUST-IN-TIME AND BACKFLISH COSTING

History of Just-in-Time (JIT)

The Just-In-Time philosophy originated as a manufacturing strategy by Taichi Ohno or the Toyota
Manufacturing Company in Japan. This was developed in 1970s to attain competitive advantage
during the post-World War II period, where Japanese automobile industry faced a crisis of
existence against its American competitors. The Japanese people then wanted to rebuild their
economy. They had a strong work ethic, concentrated much on their work rather than on leisure,
strived for continuous improvement, group conscious rather than being individualistic and tried to
achieve a common goal. During that time, an American car worker's productivity was nine times
as that of a Japanese car worker. Taiichi Ohno then pursued for ways to compete with such levels.
Because of the success of JIT management, he was named as the "Father of JIT".

As Taiichi Ohno examined the American industry, he found out that American manufacturers
utilizes economic order quantities, which is the traditional idea of making a lot or "batch" of an
item. A certain model of a car or its certain component is grouped before transferring to a new
item. They also used economic order quantities in ordering and stocking the various parts and
components needed to assemble a car. Ohno knew that these methods will not work for Japan
considering that the total domestic demand was low and its domestic marketplace demanded
production of small quantities of many different models.

Consequently, Ohno designed a new system of manufacturing based on the elimination of waste.
In his system, waste was eliminated through (1) just-in-time, where items only move through the
manufacturing systems only when they are needed; and (2) autonomation, automating the
production system so as to include inspection, where human attention is only needed when a
defect is automatically detected and the system will stop and will not proceed until the problem
has been solved. In this system, inventory is considered an unnecessary waste as too having to
deal with defects.

Ohno regarded waste as a general term and identified a number of sources of waste that should
be eliminated:
 Overproduction waste is waste from producing more than what is needed or waste from
producing too much
 Waste from waiting time is the unproductive waiting time for job processing. This is
associated with a worker who is idle while waiting for another worker to pass him an Item
that he needs (eg, such may occur in a sequential line production process)
 Waste from transportation refers to unnecessary movement of jobs. This is associated
with transporting or moving items around a factory.
 Waste from process refers to unnecessary operation of products. This is associated with
spending more time than what is necessary in processing an item on a machine.
 Waste from inventory refers to excess accumulation of products. This is associated with
keeping stocks.
 Waste from product defects refers to waste associated with defective items or those
resulting from scrap or rework.
 Motion Waste refers to unnecessary human activity.

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Toyota also changed their factory layout. Previously, all machines of the same type were situated
in the same area of the factory. This meant that Items had to be transported back and forth to
various areas as they needed processing on different types of machines. To eliminate this
transportation cost, different machines were clustered together so items could move smoothly
from one machine to another as they were processed. Workers then had to become skilled on
more than one machine instead of operating just one type of machine,
Moreover, in order to have a method of controlling production and the flow of items in their new
factory layout, Toyota introduced the kanban. The kanban carries the information as to what has
to be done in the manufacturing process. Within Toyota, the most common form of kanban was
a rectangular piece of paper within a transparent vinyl envelope. The information listed on the
paper basically tells a worker what to do, which items to collect, or which items to produce. In
Toyota, two types of kanban are distinguished for controlling the flow of items: (1) withdrawal
kanban, which details the items which should be withdrawn from the preceding step in the
process; (2) a production ordering kanban, which details the items to be produced.

This chapter introduces concepts and theories that minimize the company's commitments
to inventory while satisfying the customer's demand. The company's broad objective is to
provide product and services in a faster way and with fewer defects. It tries to improved
business activities to lessen the cost through effective and reliable performance with less
deficiencies and redundancy. To understand better, the general concept of Inventory
System in the company will be discussed and will be compared to a newer management
philosophy.

PUSH AND PULL APPROACH OF A MANUFACTURING CONCERN

Conventional manufacturing concern typically uses traditional inventory costing approach which
is based on a Just-In-Case Philosophy, It uses sequential or synchronous tracking where the
timing of recording the entries in the accounting system is synchronized with the physical
sequences of purchasing and production. Sequential tracking is often expensive. Inventories of
raw materials are maintained just in case some items are of poor quality or a key supplier is
shutdown by a strike. Subassembly parts are manufactured & stored just in case they are needed
later in the manufacturing process & finished goods are completed and stored just in case
unexpected and rush customer orders are received. This results in a push approach used in
conventional or traditional manufacturing systems. When a workstation completes its processing
on a batch of units, the partially completed goods are pushed forward to the next workstation
regardless of whether that workstation is ready to receive them. The result is an unintentional
stockpiling of partially completed goods that may not be completed for days or even weeks which
results in the buildup of extensive Inventories. Inventories have an adverse effect on net income
because they tie up funds & storage space that could be made available for more productive
purposes, thus resulting is operating inefficiencies. However, an advantage of push approach is
that the company is fairly assured that it will have enough units on hand to satisfy customer's
orders.

Push System of Production Control

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 Purchases and production are constantly pushed down into storage locations until need arises.

RM Storage Work Center Work Center Work Center

As As As
Needed Needed Needed

WORK IN WORK IN
PROCESS PROCESS
STORAGE STORAGE

RM Storage FG Storage

Sales

On the other hand, pull manufacturing system is just the opposite; it is based on Just-in- time
Philosophy True customer demand rather than sales forecasts, drives the production and
distribution. It starts with a customer's order and producing enough products to fulfill it. Thus in
other words, its aim is no inventory as much as possible. It is attractive in a sense that It eliminates
the cost of carrying inventory and storing of goods is minimized. However, the approach also
sacrifice and may bump into ordering dilemmas, like suppliers not being able to get a shipment
out on time resulting to inability to fulfill customer's order and satisfaction

Pull System of Production Control

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 Product sales dictate total production. Production and purchases are pulled through the system on
a second-needed basis.

Information flow that creates (pull) demand at each

successive operations

Physical production flow in which raw materials (RM) and

Work in Process (WIP) flow successively through work
Sales centers until completed (FG)

4 FG 1 Request for FG

11 Request for WIP 111 Request for WIP

3 WIP 2 WIP

Work Center Work Center Work Center

JUST-IN-TIME (JIT) PHILOSOPHY

As mentioned earlier, the pull approach is the Just in Time Philosophy. Just-in-time (JIT) is an
inventory strategy implemented to improve the return on investment of a business by reducing
Work-in-process (WIP) inventory and its associated carrying costs. This means that raw materials
are purchased just in time to be processed for production, manufactured parts are completed just
in time to be assembled into finished products, and finished products are completed just in time
to be shipped to customers. This concept originated in Japan by Toyota Company in 1970s and
also Kawasaki.

Companies that adopted Activity-based Costing (ABC) system also instituted JIT inventory
system which is facilitated by automation. The partially processed parts or goods are expected to
come out from one process or department just in time that they are needed for the next process
or department while finished products are directly delivered to customers and not to the
warehouse. As a result, this reduces the cost of maintaining a warehouse and such other cost of
handling raw materials, work-in-process, and finished goods inventory a long time since inventory
would be handled less often and are in smaller quantities. This process of production is used by
companies that wait for customer orders before starting production such as customized
homebuilders, furniture companies, and shipbuilders. Such system is adopted to assist them with
inventory management. These companies consider carrying inventory as a non-value-added
activity and thus minimize inventory by making components available just in time for production.

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 DID YOU KNOW?

Have you ever ordered a personal computer from Dell Inc.? If so, the PC you received was not
manufactured until you place your order, and many of the components used in the production
of your PC were not even acquired by Dell until they started its production. This system enables
Dell to maintain relatively low inventory balances. At the same time, the company's efficient
production techniques, along with its excellent relationships with suppliers ensuring prompt
delivery of components, enables Dell to quickly meet customer demand. In its January 30, 2009,
fiscal year-end financial statements, Dell reported an inventory balance of $867 million. With
this relatively low investment in inventory, Dell was able to generate over $61 billion in sales.
To appreciate its advantage, compare these numbers with Hewlett Packard (HP), a company
that includes PCs among its wide variety of technology products. For its fiscal year ended
October 31, 2008, HP reported product revenue of $91 billion. However, to achieve this level of
sales, HP's investment in inventory was nearly $8 billion.

In summary, the characteristics associated with JIT system (other than its cost recording issues)
include:
1) drastic reduction or elimination of inventories;
2) emphasis on quality or commitment to a high;
3) long-term agreements with suppliers;
4) focused factories and
5) automation

JIT Manufacturing

Manufacturing is a production process method in which products are manufactured only as

needed. It uses a product layout with a continuous flow one with no delays once production starts.
This means there must be a substantial reduction setup costs to eliminate the need to produce in
batches. JIT manufacturing is a strategy used by manufacturers to reduce the WIP inventory level.
It is dedicated to producing the right products or parts at the right time as they are needed. It is
driven by a series of signals that tell the production line to make the next piece for the product
and when it is needed. The signals used are usually simple visual signals, such as the absence
or presence of a piece that is needed in the manufacturing process.

It organizes production in manufacturing cell groups where all equipment used for a given product
are grouped together. This reduces material handling costs & sequences the production process.
Another feature of a JIT system is that workers are trained to be multi-skilled. They are trained to
operate various machines as well as to do light maintenance and repairs on the machines. It
aggressively works to eliminate defects and reduces setup time as well as manufacturing lead
time. Reduced setup costs make it more practical to produce smaller batches & react faster to
changes in customer demand. The firm only uses suppliers who are capable of meeting timely

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delivery demands and this will lead to an increase in the quality of the goods being received by
the firm.

Well-developed JIT purchasing uses blanket POs which are agreements with vendors stating the
quality expected to be needed over a period of 3 or 6 months. The exact quantity & date of
shipment are established later by a telephone call or with Electronic Data Interchange (EDI) by a
direct computer link between the buyer & seller. So this eliminates the routine purchase
requisitions, POs, receiving reports & material requisitions.

In JIT manufacturing, reorder levels for certain inventory items are set, and new stock is ordered
only when those levels are reached. There is no overstocking of parts or items, which saves on
space in the warehouse. This strategy can lead to improvements in quality and efficiency. Henry
Ford, whose automobile company bought materials only for its immediate needs in the production
process, planned the transportation of materials so that the flow of the product would be smooth.
This created a fast turnover and decreased the amount that was tied up in raw materials. Ford's
manufacturing process was adopted by many other car manufacturers. Toyota used the process
with satisfactory results and modified it to overcome some of its weaknesses, which led to what
is now known as just-in time manufacturing. The process allowed Toyota to reduce costs and
build cars more quickly. Many vehicles were built to order, which reduced the threat that they
would be built and not sold, thus eliminating a risk to the company.

Unlike some other types of manufacturing processes, with JIT manufacturing, assemblers do not
have a choice of which parts to use; every part has to fit correctly. This means that the use of
multiple suppliers usually is avoided, and quality assurance is higher. The parts used are all of
the same quality which means that quality checks are almost eliminated, leading to higher
productivity rates.

One potential flaw in JIT manufacturing is that it relies on an accurate anticipation of demand.
Manufacturers need to gauge the levels of materials and parts that they need based on their
previous or current sales figures. If there is a rise or fall in demand for the product, it could have
serious effects on the JIT manufacturing process. Manufacturers have to make sure that they
have a reliable sales forecast in place to allow for these fluctuations in sales, or they could have
problems with inventory or with the manufacturing process.

Implementing Just-In-Time (JIT) Manufacturing

There should be certain modifications to be made in people involvement, purchasing and supplier
relationships, product design and processing, and plant layout to implement JIT in a
manufacturing company.

People Involvement. In implementing JIT, it is important to maintain a good support and

agreement with the people involved in the production. This is not only to reduce the time and effort
of implementing JIT, but also to minimize the implementation problems.

Purchasing and Supplier relationships. It is ideal in a KIT to have only one vendor for
any given item, but this will create the risk of not having substitutes in cases of vendor production
strikes, unfair pricing, or shipment delays. A more feasible way is to maintain a limited number of

6
vendors that are properly selected and company-certified as to quality and reliability. The
company then considers these suppliers as partners. Building partnerships with fewer vendors on
a long-term basis provides the opportunity to improve quality and reduce costs. Total quality
control is achieved through weeding out of undependable suppliers and through employees'
training.

Product design and processing Company's products must be designed such that it uses a few
number of parts. These parts need to be standardized but this does not necessarily mean
producing identical products only. The implementation of high-quality standards that result in zero
quality errors is an essential part of JIT processing. Products should be designed for the desired
quality and should require minimal engineering changes once the design is released for
production. JIT aims to reduce machine setup time, which allows processing to rapidly shift among
different products at a lower cost.

Plant Layout. The physical plant or factory should be arranged in a way that is convenient
to the flow of parts and components of the product and the organization of workers. It should also
be arranged in a way that it increases the value added per square foot of plant space.
Manufacturing cells (process or area) may be arranged in linear or U shaped production,
composed of group of workers or machines. This arrangement reduce inventory storage, improve
material handling and flow, increase machine utilization rates, maximize communication among
workers, and result in better quality control

JIT involves controlling the flow of materials and manpower so that adequate resources are on
hand when needed. It ensures that the company produces and delivers the right items at the right
time and amount. A flexible workforce is developed through cross-training of employees
Operation should be able to perform multi-machine handling (also called horizontal handling) and
multi-process handling (also called vertical handling. le horizontal handling, a worker should
handle several machines at once while in vertical handling, a worker should handle several
different processes at once. In other words, it means that one worker is responsible for several
processes in a cell.

The JIT philosophy synchronizes well with the lean manufacturing six sigma implementation
process. JIT techniques strive to manufacture with zero defects through improving lead time and
reducing the inventory on hand. Also, factory layout is restructured to enable more efficient use
of the workforce - with less idle time, workers' efforts produce more, and quality improves.

Advantages of JIT
1. Set up times are significantly reduced in the factory.
2. The flows of goods from warehouse to shelves are improved.
3. Employees who possess multiple skills are utilized more efficiently.
4. Better consistency of scheduling and consistency of employee work hours
5. Increased emphasis on supplier relationship
6. Supplies continue around the clock keeping workers productive and businesses focused
on turnover
7. Lower investment in inventories and space to store inventory
8. Lower carrying and handling cost of inventory
9. Reduced risks of Inventory obsolescence

7
 10. Reduced manufacturing costs

Limitations of JIT

Regardless of the aforementioned benefits of JIT, it has its limitations as follows:

1. Time and effort are required to convert many suppliers to JIT shipping pattern.
2. Difficulty of obtaining shipping at a cost low enough to justify many small deliveries,
3. Likelihood of occasional delays if suppliers are hundreds of miles away.
4. Frustrating tendency for a low cost, allegedly noncritical part to become critical when it
does not arrive on time and an important customer's order cannot be finished because
there is no safety stock.
5. The original WIP level may be cut to a half or a quarter but typically, the remaining WIP is
still quite large.
6. Most adoptions of cell organization are also only partial.
7. JIT is limited in its applicability to different patterns of demand.
8. JIT implementation can create conflicts with performance measures

With a JIT inventory system, there is no stockpile of inventory to draw on when strikes or other
forces disrupt inventory deliveries. This illustrates a potential negative effect of using a JIT
inventory system. As to culture differences, the organizational cultures vary from one firm to
another. There are some cultures that tie to JIT success but it is difficult to change its cultures
within a short time. Resistance to change to JIT involves a change throughout the entire company.
The most common resistance are emotional resistance and rational resistance. Emotional
resistance are those psychological feeling which hinder performance such as anxiety. Rational
resistance is being deficient of the needed information for the workers to perform the job well.

Accounting Implication of JIT Philosophy

Backflush costing, also called backflushing or backflush accounting, is a non-traditional type of

costing that complements JIT manufacturing systems that is why it is sometimes called JIT
costing. JIT Costing sometimes are referred to as Backflush Costing because the product costs
are "flushed out of the accounting system and attached to products only after they are completed.
This is the reverse of the traditional costing system which attaches costs to products via the WIP
account. JIT costing is also known as delayed costing, endpoint costing, or post-deduct costing.
It then uses budgeted or standard costs to work backward to flush out the manufacturing costs
for the units produced.

JIT costing differs from traditional costing system as it does not use a Work in process (WIP)
account. Materials Inventory and Work-in-process in the traditional costing are combined in JIT
using a Raw-and-in-Process (RIP) account. It combines direct labor and factory overhead into a
Conversion Cost account although in some companies, direct labor is actually included in the
Factory Overhead account. Sometimes, they are directly charged to Cost of Goods Sold (CGS)
account. In traditional costing, factory overhead is applied to products as they are being produced
and recorded into the Work-in-Process (WIP) account.

It does not track costs in order, instead, it delays the recording of certain costs, Labor and
overhead are normally accumulated directive in Cost of Goods Sold account under JIT costin9
since work-in-process and finished goods inventory are usually minimal. At The end of the period,
the conversion costs of the uncompleted or unsold products are backflushed and included in

8
either work-in process or finished goods Inventory account, respectively, when products are
completed under JIT costing, direct labor and factory overhead are added to CGS, since the
goods are sold soon after production is completed.

Backflush costing is a short-cut approach to accounting for the flow of manufacturing operations.
It delays recording journal entries until the goods moved through the manufacturing process. It
has the purpose of simplifying and reducing the number of events that are measured and recorded
in the accounting system. Under backflush costing, the inventories are not adjusted during the
accounting period to reflect the different production costs, instead, adjustments are made at the
end of the period.

Advantages of backflush costing include the following: (1) simple estimates sequential costing
methods by varying the trigger points and (3) it can be used with several production methods.

There are two (2) disadvantages of backflush costing, namely: it does not adhere to GAAR and
absence of audit trails or the potential loss of an audit trail. The principal reason why backflush
costing does not strictly adhere to GAAP is that the work-in-process accounts are not recognized
in the accounting records. Substantial business resources were dedicated to their production, and
should be recognized in the accounts as an asset. This approach to costing is usually used by
companies that adopt JIT production methods. While not totally devoid of inventories, such
companies seek to minimize inventories thus minimizing the problems associated with no work-
in-process accounts.

Difficulties in Backflush Costing

A chief attraction of backflush costing is its simplicity. Simple system, however, generally do not
yield as much information as do more complex systems. There is absence of audit trails that is
the ability of the accounting system to pinpoint the uses of resources at each step of the
production process. Managers keep track of operation by personal observation, computer
monitoring and non-financial measures. In addition, actual material quantities, conversion costs
and scrap can be identified with individual departments and activity areas. Variances are
computed at the department or activity area level at least monthly and sometimes daily.

There are three 3) methods illustrating backflush costing. These methods differ on its trigger
points. Trader points are simply events that prompt or trigger the accounting recognition of certain
manufacturing costs or a stage in the production cycle at which an accounting entry is made.
These trigger points are (1) purchase of raw materials: (?) completion of finished units and (3)
sale of finished units,

Production of
Traditional Purchase of Completion of Sale of
= = Work in = =
Trigger Points Direct Materials a Finished Unit Finished Unit
Process

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Case A:

The following transactions occurred during March, 2013 of BERTUD Corporation, manufacturer
of light bulbs:

 Bertud purchased raw materials worth P250,000.

 All materials purchased were requisitioned for production.
 Direct labor incurred, P130,000.
 Actual factory overhead amounted to P145,000.
 Applied conversion costs, P280,000
 All light bulbs were completed and sold.

TRADITIONAL COST (4 TRIGGER BACKFLUSH COSTING (3 TRIGGER

POINTS) POINTS)

A. Purchase of RM and record other A. Purchase of RM and record other

manufacturing cost manufacturing cost
Materials 250,000 Raw and In Process 250,000
Accounts Payable 250,000 Accounts Payable 250,000

Payroll 130,000 Conversion Cost 275,000

Accrued Payroll 130,000 Accrued Payroll 130,000
Miscellaneous Accts. 145,000
Factory Overhead Control 145,000
Miscellaneous Accounts 145,000

B. Production resulting to WIP

Work-in-Process 530,000
Materials 250,000
Payroll 130,000
Applied FOH 150,000

C. Completion of Units C. Completion of Units

Finished Goods 530,000 Finished Goods 530,000
Work-in-process 530,000 Raw and In Process 250,000
Applied Conversion Cost 280,000

D. Sale of Finished Goods D. Sale of Finished Goods

Cost of Goods Sold 530,000 Cost of Goods Sold 530,000
Finished Goods 530,000 Finished Goods 530,000

Under JIT Costing, no journal entries are to be made in the production area. In JIT -three trigger
points, the Work in Process account is eliminated. However, upon recognition of raw materials,
the account Raw and In Process is simultaneously recognized. Furthermore, the direct labor and
factory overhead are combine together into one account and Conversion Cost account will be
used.

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Firms that might use backflush costing are those using JIT production, have fast manufacturing
lead times, or have very stable inventory levels from period to period or where the cycle time is
relatively short and inventory levels are low. It can even be used by companies without JIT
systems.

JIT is supposed to simplify record keeping. Backflush cost accounting system eliminates the
recording of the movement of raw materials into WIP account. It reports movements of inventory
when it is finished or, even in some cases, sold. WIP Inventory is updated only after taking a
physical count.

If only two trigger points are used, which are If only two trigger points are used, which are
the purchase of raw materials and sale of the completion of finished goods and sale
finished goods, the cost of finished units of finished goods, the cost of materials
are recorded only when the finished goods used are recorded only when the goods are
are sold. Journal entries will be as follows: finished. Journal entries will be as follows:

A. Purchase of RM and record other B. Record other manufacturing cost

manufacturing cost Conversion Cost 275,000
Raw and In Process 250,000 Accrued Payroll 130,000
Accounts Payable 250,000 Miscellaneous Accts. 145,000

Conversion Cost 275,000

Accrued Payroll 130,000
Miscellaneous Accts. 145,000

D. Sale of Finished Goods C. Completion of Units and Sale of FG

Cost of Goods Sold 530,000 Finished Goods 530,000
Raw and In Process 250,000 Accounts Payable 250,000
Applied Conversion Cost 280,000 Conversion Cost 280,000

Cost of Goods Sold 530,000

Finished Goods 530,000
Cost of bulbs sold

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Case B:

Mezcal Manufacturing Co. has a mature JIT production system with average cycle time of less
than one day. Total time from receipt of raw material to completion of finished product is less than
3 days. The company uses a Finished Goods and Raw and In Process (RIP) inventory account;
there is a separate account, Supplies for indirect factory materials. The company expenses all
conversion costs to the CGS account. At the end of each month, all inventories are counted. Their
conversion cost components are estimated, and inventory account balances are adjusted
accordingly. Raw material cost is backflushed from RIP to FG and from FG to CGS, The following
information is a summary of selected transactions and other information for May:

Beginning balances in inventory accounts:

Raw and In Process --------------------------- P 31,300

Finished Goods -------------------------------- 280,000
Supplies ------------------------------------------ 17,000

May 31 inventories based on physical count:

Raw and In Process---------------------------- P 37,100

Finished Goods Supplies -------------------- 294,000
Supplies ----------------------------------------- 27,000

The May 1 RIP balance consisted of a P 30,000 cost of materials, most of which were not yet in
process, plus a P 1,300 conversion cost estimate assigned to partially processed work. The FG
balance consisted of P 150,000 material cost and a P 130,000 estimate of conversion cost.

The May 31 RIP amount consisted of a P 35,000 cost of materials, most of which were not yet in
process, plus a P 2,100 conversion cost estimate assigned to partially processed work. The FG
amount consisted of P 160,000 material cost and a P 134,000 estimate of conversion cost.

a) Direct materials received on credit cost P 620,000.

b) Indirect materials used cost P 10,000
c) Gross payroll of P 300,000 was recorded; the payroll was paid.
d) The payroll distribution was:
Direct labor………… P 50,000 Marketing Salaries …...……. 90,000
Indirect factory labor 90,000 Administrative salaries…….. 70,000

e) Factory overhead costs:

Depreciation………………..P 514,000
Insurance…………………… 9,000

f) Miscellaneous factory overhead costs:

Paid in cash ……………….P 26,000
On Account ……………….. 7,000
g) The factory overhead accumulated in the FOC account was expensed to CGS.
h) h) The material cost component of completed work is backflushed from RIP.
i) The material cost component of work sold is backflushed from FG.
j) Ending balances are established in inventory accounts by adjusting their conversion cost
components.

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The transactions listed above shall be recorded as follows:

a) Raw and In Process P 620,000

Accounts Payable P 620,000

b) Factory Overhead Control P 10,000

Supplies P 10,000

c) Payroll P 300,000
Accrued Payroll P 300,000

Accrued Payroll P 300,000

Cash P 300,000

d) Cost of Goods Sold P 50,000

Factory Overhead Control 90,000
Marketing Expenses 90,000
Administrative Expenses 70,000
Payroll P 300,000

Note: Direct labor cost is charged directly to Cost of Goods Sold (CGS) account.

e) Factory Overhead Control P 523,000

Accumulated depreciation P 514,000
Prepaid Insurance 9,000

f) Factory Overhead Control P 33,000

Cash P 26,000
Accounts Payable 7,000

g) Cost of Goods Sold P 656,000

Factory Overhead Control P 656,000

Note: Overhead is charged directly to Cost of Goods Sold (CGS) account.

h) Finished Goods P 615,000

Raw and In Process P615,000

To backflush material cost from RIP to FG:

Material cost in RIP account on May 1 . . . . . . . . . . . . . . . . . . P 30,000
+ Materials received in May . . . . . . . . . . . . . . . . . . . . . . . . 620,000
- Material cost in RIP account on May 31 per physical count. . . . . . (35,000)
Amount to be backflushed P 615,000

i) Cost of Goods Sold P 605,000

Finished Goods P 605,000

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 To backflush material cost from FG to CGS:
Material cost in FG account on May 1. . . . . . . . . . . . . . . . . . . . . . P 150,000
+ Material cost transferred from RIP . . . . . . . . . . . . . . . . . . . . . . . . . 615,000
- Material cost in FG account on May 31 per physical count. . . . . . . . . (160,000)
Amount to be backflushed P 605,000

j) Raw and In Process P 800

Finished Goods 4,000
Cost of Goods Sold P 4,800

Conversion costs in the inventory accounts are adjusted. For RIP, the adjustment is from P 1,300
reported on May 1 to P 2,100 reported on May 31, hence there is an Increase in RIP account by
P 800. For FG, the adjustment is from P130,000 reported on May 1 to P134,000 reported on May
31, hence there is an increase in FG account by P4,000. The total debit adjustments will be
credited to Cost of Goods Sold (CGS) account where all the conversion costs for the month are
ultimately transferred. In the company's general ledger, the CGS account will have a debit excess
of P 1,306,200 prior to the closing of the books for the current year.

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