Page 806 - Accounting Principles (A Business Perspective)

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inventories backwards from Cost of Goods Sold to Finished Goods Inventory and/or Work in Process Inventory
accounts.
For example, say Arizona Sunscreen Company uses the JIT method. Direct materials costs are USD 3.00 per

bottle and other manufacturing costs are USD 1.50 per bottle. The company received an order for 10,000 bottles of
sunscreen. Materials costs were USD 30,000 and other manufacturing costs were USD 15,000. Assume that USD
6,000 of these other costs are wages and the remaining USD 9,000 were applied to production from overhead.
Assume also the company had an inventory of USD 4,500 left in work in process as of the date financial statements
were prepared.
Traditional methods Using traditional methods of recording costs, the costs would flow through the
inventory accounts to Cost of Goods Sold as shown by the following journal entries:

(1) Materials inventory (+A) 30,000
Accounts payable (+L) 30,000
To record the purchase of materials.
(2) Work in process inventory (+A) 45,000
Materials inventory (-A) 30,000
Payroll summary (+L) 6,000
Overhead (applied) (+SE) 9,000
To record production costs in the work in
process account.

(3) Finished goods inventory (+A) 40,500
Work in process inventory (-A) 40,500
To transfer product from work in process to
finished goods.

(4) Cost of goods sold (-SE) 40,500
Finished goods inventory (-A) 40,500
To record the cost of the goods sold.
Just-in-time and backflush costing Using a just-in-time accounting system, the accountants would initially
assume the company has no inventories. Therefore, they would debit all costs directly to Cost of Goods Sold, as
follows:
(1) Cost of goods sold (-SE) 30,000
Accounts payable (+L) 30,000
To record the use of materials.

(2) Cost of goods sold (-SE) 15,000
Payroll summary (+L) 6,000
Overhead (applied) (+SE) 9,000
To record other manufacturing costs.
Upon learning the company has USD 4,500 of inventory in work in process, the accountants would back out
USD 4,500 from Cost of Goods Sold, as follows:

(3) Work in process inventory (+A) 4,500
Cost of goods sold (+SE) 4,500
To record inventory.
This last entry is the backflush costing step. These entries appear in T-accounts in Exhibit 161.
Just-in-time production simplifies accounting procedures. If the costs of these sunscreen bottles were charged
into production using traditional costing methods, it would be necessary to debit the materials costs to a Materials
Inventory account. As the materials were used, their costs would be transferred to Work in Process Inventory and

other manufacturing costs would be charged to Work in Process Inventory. As goods were completed, costs would

Accounting Principles: A Business Perspective 807 A Global Text