DEFINITION OF JUST-IN-TIME

Just-in-time inventory is a management strategy that aims to increase a firm’s operating

efficiency and decrease the level of waste by only keeping enough stock on hand to fill
current orders or maintain production. (Dictionary)

Just-in-time (JIT) means that raw materials are received just in time to go to production,
manufactured parts are completed just in time to be assembled into products, and
products are completed just in time to be shipped to customers. (Norma D. De Leon)

Just in time inventory is the reduced amount of inventory owned by a business after it
installs a just-in-time manufacturing system. The intent of a JIT system is to ensure that
the components and sub-assemblies used to create finished goods are delivered to the
production area exactly on time. Doing so eliminates a considerable investment in
inventory, thereby reducing the working capital needs of a business. This type of system
is called a "pull" system. Under the JIT concept, inventory may be reduced by the
following means: (tools)

· Reduced production runs. Fast equipment setup times make it economical to create
very short production runs, which reduces the investment in finished goods inventory.

· Production cells. Employees walk individual parts through the processing steps in a
work cell, thereby reducing scrap levels. Doing so also eliminates the work-in-
process queues that typically build up in front of a more specialized work station.

· Compressed operations. Production cells are arranged close together, so there is

less work-in-process inventory being moved between cells.

· Delivery quantities. Deliveries are made with the smallest possible quantities,
possibly more than once a day, which nearly eliminates raw material inventories.

· Certification. Supplier quality is certified in advance, so their deliveries can be sent

straight to the production area, rather than piling up in the receiving area to await
inspection.

· Local sourcing. When suppliers are located quite close to a company's production
facility, the shortened distances make it much more likely that deliveries will be made on
time, which reduces the need for safety stock.
Advantages of JIT Inventory

There is a multitude of improvements related to JIT inventory, particularly in relation to

reduced cash requirements and the ease with which manufacturing problems can be
uncovered. Advantages of JIT inventory include:

· Working capital. JIT inventory is designed to be exceedingly low, so the investment

in working capital is minimized.

· Obsolete inventory. Since inventory levels are so low, there is little risk of having
much obsolete inventory.

· Defects. With so little inventory on hand, defective inventory items are easier to
identify and correct, resulting in lower scrap costs.

· Process time. A thoroughly implemented JIT system should shorten the amount of
time required to manufacture products, which may decrease the quoted lead times given
to customers placing orders.

· Engineering changes orders. It is much easier to implement engineering change

orders to existing products, because there are few existing stocks of raw materials to draw
down before you can implement changes to a product.

Disadvantages of JIT Inventory

There is one key problem with JIT inventory, but it is a large one:

· Shortages. Low JIT inventory levels make it more likely that any problem in the
supplier pipeline will lead to a shortage that will stop production. This risk can be
mitigated through the use of expensive overnight delivery services when shortages occur.
(tools)

Just-in-time (JIT) costing differs from traditional costing with regards to the accounts
used and the timing of cost recording. In JIT, we do not maintain Materials inventory,
because we buy materials unless it is put into the process. We do not maintain Work in
process inventory because it won’t take time to process because of automation. And so
with Finished goods inventory because we will not make it until somebody wants it, so it's
immediately sold. That is why JIT uses backflushing by eliminating so many accounts
used under traditional costing. All costs, Direct Material, Direct Labor, and Factory
Overhead are all recorded in the Cost of Goods Sold. Since we do not make a product
until it is sold, every single day all costs will be put to the cost of goods sold until the end
of the period. At the end of the period, if we find goods at the loading dock area for
delivery to a client with complete data of cost, that is to be backflush to the finished
goods account. The entry would be debit Finished goods and credit to Cost of goods
sold. When we go to the production area and there are still in process so that is a work in
process. The entry would be: Debit to Work in process and Credit to Cost of goods sold.

Comparison of Cost Flows in Traditional and Back-flush Costing

(Hooper)

To compare JIT costing with traditional costing assumes that TRAMS Co. manufactures
cellular phones and uses a JIT production system. The following transactions occurred
during January.

(1) TRAMS purchased P20,000 of raw materials.

(2) All materials purchased were requisitioned for production.

(3) TRAMS incurred direct labor costs of P8,000.

(4) Actual factory overhead cost amounted to P24,000.

(5) TRAMS applied conversion costs total P32,000 (including direct labor cost of P8,000)
(6) Finished goods from the production area totals P51,600 and sold P51,500 of its
completed cellular phones.

JOURNAL ENTRIES UNDER THE TRADITIONAL COSTING SYSTEM

(1)Materials 20,000

Account Payable 20,000

(2)Work in Process 20,000

Materials 20,000

(3)Work in Process 8,000

Accrued Payroll 8,000

(4)Factory Overhead Control 24,000

Miscellaneous accounts 24,000

(5)Work in Process 24,000

Factory Overhead Applied 24,000

(6)Finished Goods 51,600

Work in Process 51,600

(7)Cost of Goods Sold 51,500

Finished Goods 51,500

JOURNAL ENTRIES UNDER THE JUST-IN-TIME COSTING SYSTEM

Under JIT costing, no entries are made for transactions (2), (3), and (5). Entry (2) is not
necessary because the placement of materials into production is implied in a transaction
(1) when the materials are first received. No separate entry is made for (3) because direct
labor is combined with factory overhead and maybe debited first to conversion cost or
maybe debited directly to the cost of goods sold. For illustration, we will use directly to
Cost of Goods Sold.
 (1) Raw and in process 20,000
Accounts Payable 20,000

(3)Conversion cost 8,000

Accrued Payroll 8,000

(4)Conversion cost 24,000

Miscellaneous Accounts 24,000

(5) Cost of Goods Sold (Direct materials) 52,000

Raw and in process 20,000
Conversion cost 32,000

(6)Finished goods 100

Work in process 400
Cost of Goods Sold 500

Cost Flows through T Accounts in Traditional and Back-flush Costing

(Hooper)

ILLUSTRATIVE PROBLEM 1
Assumes that Wirings’ Company uses JIT costing for the production of goods during
the month of January. The following transactions summarize the major steps in
Wirings’ productions during the month of January.
1. Raw materials received from suppliers amounted to P4,000.
2. Direct labor cost of P10,400 and overhead costs of P7,800 were incurred and
applied, respectively, during the month of January.
3. The cost of work-in-process at January 31 was P3,600. This cost was determined
through the production report and is composed of the following elements:
Direct materials P1,500
Direct labor 1,200
Overhead 900
In addition, assume that finished goods inventory at January 31 was P6,500, consisting
of:
Direct materials P1,500
Direct labor 2,850
Overhead 2,150

The journal entries under JIT costing are shown below.

1. Raw and in process 4,000

Accounts payable 4,000
To record product cost.

2. Cost of goods sold 18,200

Wages payable 10,400
Factory overhead control 7,800
To record conversion cost.

3. Finished goods 2,500

Raw and in process 2,500
To record transfer of cost of units completed.

Raw materials received 4,000

Less: Materials in Raw and in process 1,500
Amount to be backflushed 2,500

4. Cost of goods sold 1,000

Finished goods 1,000
To record transfer of units sold.

Materials cost of units completed 2,500

Less: Materials in Finished goods, end 1,500
Amount to be backflushed 1,000

5. Raw and in process 2,100

Finished goods 5,000
Cost of goods sold 7,100
 To adjust cost of goods sold.

For Raw and in process:

Labor cost – raw and in process 1,200
Overhead – raw and in process 900
Total to be adjusted. 2,100

For Finished goods

Labor cost – raw and in process 2,850
Overhead – raw and in process 2,150
Total to be adjusted. 5,000

ILLUSTRATIVE PROBLEM 2
Assume that Stillwater Manufacturing has a cycle time of less than a day, uses a Raw and in
process (RIP) account and expenses all conversion costs to Cost of Goods Sold. At the end of each
month, all inventories are counted; their conversion cost components are estimated and
inventory account balances are adjusted accordingly. Raw materials are backflushed from RIP to
Finished goods. The following information is for the month of August.

RIP beginning, including P6,900 of conversion cost P42,600

FG beginning, including P17,000 of conversion cost 45,000
Raw materials purchased on credit 356,000
RIP end, including P4,500 of conversion cost 22,500
FG end, including P5,000 of conversion cost 16,000
Direct labour – P150,000; factory overhead – P180,000

Prepare all journal entries that involve the RIP account and/or finished goods account.

Solution:

1) Raw and In Process 356,000

Accounts Payable 356,000

2) Finished goods 373,700

Raw and In Process 373,700

Raw materials purchased 356,000

RIP beg. (42,600-6,900) 35,700
RIP end (22,500-4,500) ( 18,000)
Mat. content of units completed 373,700
3) Cost of goods sold 390,700
Finished goods 390,700

Mat. content of units completed 373,700

FG beg.(45,000-17,000) 28,000
FG. End (16,000-5,000) ( 11,000)
Mat. content of units sold 390,700

4) Cost of goods sold 330,000

Payroll 150,000
FO Applied 180,000

4) Cost of goods sold 14,400

Raw and In Process 2,400
Finished goods 12,000

Conversion cost RIP FG

End 4,500 5,000
Beg. ( 6,900) (17,000)
Increase (decrease) ( 2,400) ( 12,000)

LEARNING ASSESSMENT

MULTIPLE CHOICE

1. One of the requirements for a JIT system to be successful is:

A. cyclical production

B. adequate inventory stock

C. coupling it with job order costing

D. high quality and balanced work loads

E. all of the above

 2. All of the following are terms used to describe the JIT effort to reduce
inventories of work in process and raw materials, except:

A. backflush production

B. stockless production

C. lean production

D. ZIP production

E. none of the above are appropriate terms

3. The JIT production ideal is a batch size of:

A. one hundred

B. ten

C. one

D. zero

E. none of the above

4. The objective of reducing inventory to zero is possible if all of the following

conditions are present, except:

A. low or insignificant setup costs

B. minimum lead times

C. long setup times

D. balanced and level workloads

E. no interruptions due to stockouts

 5. The continuing reduction of inventories is achieved by all of the following
steps except:

A. inventories are reduced until a problem is discovered

B. once the problem is defined the inventory level is increased to keep

the system operating smoothly

C. the problem is analyzed and practical ways are identified to reduce it

D. once the problem is removed, the inventory level is increased until

another problem is discovered

E. all of the above steps are required

6. In a JIT system, velocity is inversely related to:

A. backflushing

B. throughput time

C. acceleration

D. zero inventory production

E. none of the above

7. If 500 units are produced per day and 2,000 units are in process at any time,
the throughput time is:

A. 1/2 day

B. 1/4 day

C. two days

D. four days

E. none of the above

 8. In a JIT system, if the rate of output is doubled while the number of units in
the process is cut in half, then the speed of the system has been:

A. reduced by 25%

B. doubled

C. reduced by 50%

D. quadrupled

E. none of the above

9. Of the following, the only activity that adds value to a product is:

A. processing time

B. moving time

C. waiting time

D. inspection time

E. all of the above

10. The costs to be offset against the savings from lower work in process levels
in a JIT system include all of the following, except:

A. handling a larger number of small batches of work in process

B. the higher probability of shutdowns due to the smaller safety stock

C. the possibility that setup costs cannot be reduced enough to offset

the larger number of setups

D. the possibility of customer dissatisfaction due to slower response

time to orders

E. all of the above

 11. Advantages that result from reducing raw materials inventory include all of
the following except:

A. a decreased possibility of not being able to produce a unit when

required

B. a need for less storage space

C. a reduced risk of obsolescence

D. reduced risk of damaged materials

E. all of the above are advantages

12. Under a JIT approach to purchasing, the ideal number of vendors for each
material is:

A. two

B. less than six

C. one

D. as many as can supply quality goods

E. none of the above

13. All of the following are obstacles to JIT purchasing, except:

A. the layout of the production process

B. the frequency of schedule changes

C. the attitudes of purchasing agents and suppliers

D. the distance from suppliers

E. all of the above are obstacles

 14. JIT purchasing eliminates all of the following documents, except:

A. purchase requisitions

B. blanket purchase orders

C. receiving reports

D. materials requisitions

E. all of the above are eliminated

15. All of the following statements apply to a JIT work cell except that:

A. a cell is responsible for the entire production of a product or part

B. every worker in the cell specializes in a single task

C. a cell's workers may be evaluated and rewarded as a team

D. all workers in a cell are responsible for product quality

E. all of the above statements apply

16. All of the following are JIT performance measures, except:

A. capacity utilization

B. cycle time efficiency

C. inventory turnover

D. unscheduled maintenance downtime

E. number of defects

17. The cost accounting system that is noted for its lack of detailed tracking of
work in process during the accounting period is:
 A. process costing

B. job order costing

C. standard costing

D. actual costing

E. backflush costing

18. The cost accounting system that would be most apt to use a single
inventory account entitled Raw and In-Process (RIP) would be:

A. backflush costing

B. process costing

C. job order costing

D. historical costing

E. standard costing

19. To backflush materials cost from Raw and In Process (RIP) to Finished
Goods, the calculation would be:

A. materials in ending RIP inventory plus materials received during the

period minus materials in the beginning RIP inventory

B. materials in ending finished goods inventory plus materials cost

transferred from RIP minus materials in beginning finished goods inventory

C. materials in beginning, finished goods inventory plus materials cost

transferred from RIP minus materials in ending finished goods inventory

D. materials in beginning RIP inventory plus materials received during

the period minus materials in ending RIP inventory

E. none of the above

 20. Cheeta Company has materials cost in the June 1 Raw and In-Process of
$10,000, materials received during June of $205,000 and materials cost in the June 30 Raw
and In-Process of $12,500. The amount to be backflushed from Raw and In-Process to
Finished Goods at the end of June would be:

A. $215,000

B. $202,500

C. $207,500

D. $217,500

E. none of the above

21. In backflush costing, if the conversion cost in the Raw and In-Process was
$500 on July 1 and $1,000 on July 31, the account to be credited at the end of July for the
$500 increase would be:

A. Raw and In Process

B. Finished Goods

C. Raw Materials

D. Cost of Goods Sold

E. none of the above

22. In backflush costing, if the conversion cost in Raw and In-Process was
$1,000 on March 1 and $400 on March 31, the account to be credited for the $600 decrease
would be:

A. Raw and In Process

B. Finished Goods

C. Raw Materials

D. Cost of Goods Sold

 E. none of the above

PROBLEM 1.

The EFGA Corporation manufactures copying machines and uses a JIT production
system. The following transactions occurred during January.

(1) EFGA purchased P40,000 of raw materials.

(2) All materials purchased were requisitioned for production.

(3) EFGA incurred direct labor costs of P16,000.

(4) Actual factory overhead cost amounted to P48,000.

(5) EFGA applied conversion costs total P64,000 (including direct labor cost of P16,000)

(6) Finished goods from the production area totals P103,200 and sold P103,000 of its
completed copying machine

Required: Prepare all journal entries under JIT.

PROBLEM 2.

The MagnoliaCorporation has a cycle time of 1.5 days, uses a Raw and In-Process (RIP)
inventory account and expenses all conversion costs to the cost of goods sold 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 Finished Goods. The following information is for the month of
June:

Beginning balance of RIP account, including P2,400 of conversion cost P23,400

Beginning balance of finished goods account, including P8,000 of

conversion cost............................................................................................. 24,000

Raw materials received on credit................................................................... 444,000

Ending RIP inventory per physical count, including P3,600 conversion

cost estimate............................................................................................ 25,600

Ending finished goods inventory per physical count, including P7,000

conversion cost estimate........................................................................ 19,000

Direct labor – P210,000; factory overhead – P189,000

Required: Prepare journal entries to record the given transactions