Backflush Costing Case Study

The key to JIT is simplification and this can also flow through to costing. Some firms with JIT production systems have adopted a simplified costing system called backflush costing.

In Exhibit 19.7, the journal entries that Caroma could use in backflush costing are shown, as well as the corresponding entries under a conventional costing system. Note that backflush costing makes no distinction between raw material and work in progress inventories. After all, in a JIT environment these inventories are kept very low and, ideally, any purchases are placed directly into production. Each journal entry under backflush costing is described below.

1. Raw material purchases are recorded directly in an account called raw and in process inventory (the RIP account).

2. Direct labour cost is combined with manufacturing overhead in a single account. Actual conversion cost are accumulated by debiting a temporary account with a title such as conversion cost (see entry (b)). Additional details maybe recorded by first entering these amounts in various departmental labour and overhead accounts, and then closing these temporary accounts to be conversion costs account.

3.When goods are finished, this triggers the release of direct material costs from the RIP account to the finished

Dell’s use of just in time result in cost savings, superior customer satisfaction, limited waste and the ability to provide their suppliers with more information. In the end all these benefits are result in a cost savings for Dell and high revenue. As a conclusion , 13 years ago, Dell carried 20-25 days of inventory in a sprawling network of warehouse , but nowadays , Dell has no warehouse, and assembles nearly 80,000 computer every 24 hours, it carries no more than 2 hours of its inventory in the factory and a maximum of 72 hours across its entire