MAF635

JUST-IN-TIME & BACKFLUSH

ACCOUNTING AND
TARGET COSTING
Prepared by:
ROXANA BINTI HAJI ATAN ABD. AZIZ 2010994085

SITI NADIA BT SULAIMAN 2011384963

NORHANA AINI BT GULAM MOHD 2011136893

UMMU SAMRAA BINTI ABD MALEK

Group : ACB10BLA

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Table of Contents:

1. Introduction

2. The mechanism of SMA technique

3. The Advantages and Disadvantages of JIT

4. The Advantages and Disadvantages of Back flush accounting

5. Real case of the Implementation of the Just-in-Time Technique

6. JIT Implementation in Malaysia

8. Challenges of the SMA technique

9. Conclusion

10. References

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 1. INTRODUCTION

It has been a definitive objective of manufacturing industries that is to provide a better

quality of products, at a reasonable price and at the ideal time. As today world economy
demands businesses to have the flexibility to cope with the short product life cycles
while decreasing waste, reducing cost and improving the product quality, Just-in-time
(JIT) management approach which originates from Japan in 1950s have long been
proven in the manufacturing sector to cope with the said circumstances.

JIT is a production and inventory control system in which materials or products are
acquired or produced only as demand requires. Basically, it is based on the standard of
giving the customers what they want and when they want it. Activities such as storing
materials are considered non-value adding activities in the JIT approach. Still, it is
impossible for companies to hold no stock.

Backflush accounting approach has been developed to meet the requirement of JIT
manufacturing. It is an accounting method whereby the costs associated with producing
a good or service are recorded only after the good and service is actually produced,
completed and sold.

Backflush accounting is a certain type of "postproduction issuing", it is a product costing

approach, used in a Just-In-Time (JIT) operating environment, in which costing is
delayed until goods are finished. Standard costs are then flushed backwards through
the system to assign costs to products. The result is that detailed tracking of costs is
eliminated. Journal entries to inventory accounts may be delayed until the time of
product completion or even the time of sale, and standard costs are used to assign
costs to units when journal entries are made. Backflushing transaction has two steps:
one step of the transaction reports the produced part which serves to increase the
quantity on-hand of the produced part and a second step which relieves the inventory of
all the component parts. Component part numbers and quantities-per are taken from the
standard bill of material (BOM). This represents a huge saving over the traditional
method of a) issuing component parts one at a time, usually to a discrete work order, b)
receiving the finished parts into inventory, and c) returning any unused components,
one at a time, back into inventory.

It can be argued that backflush accounting simplifies costing since it ignores both labour
variances and work-in-process. Backflush accounting is employed where the overall
business cycle time is relatively short and inventory levels are low.

Backflush accounting is inappropriate when production process is long and this has
been attributed as a major flaw in the design of the concept. It may be also be
inappropriate if the bill of materials contains not only piece goods but also many parts
with more or less variable consumption. If the parts with variable consumption are just a

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few, like grease or the ink used to print product-labels, the consumed quantities can be
assigned to product-independent cost centers at the withdrawal from stores
(preproduction issuing) and can eventually be broken down afterwards to specific
products or product groups, just like any other indirect or overhead expense. Difficulties
maintaining correct inventories on shop floor may also appear if it is usual practice to
use alternative materials and/or quantities without needing derogation. Therefore, in
case of a more complex production system, it is a better approach to use a
Manufacturing Execution System (MES) which gathers real production data and is able
to deliver exact data to the accounting software or Enterprise resource planning-system
where the goods issue is recorded. Thus, variances in consumption, in comparison to
the standard bill of materials, are taken into account and assigned to the correct
product, production order and workplace. Another advantage of using a MES is that it
implements also the Production Track & Trace and the status of work in progress is also
known in real time. A disadvantage of MES is that it is not suitable for small series or
prototype production. Such type of production should be segregated from the series
production and mass production.

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 2. THE MECHANISM OF JIT AND BACK FLUSH ACCOUNTING TECHNIQUE.

JIT philosophy is focusing on the elimination of waste. It is characterized as a move

towards little or no inventory, elimination of non-value added activities, better product
quality, minimal production times, small lot sizes and deliveries on time. The difference
between JIT and traditional is that in traditional approach, large amount of inventory are
stored.

JIT can be divided into JIT purchasing and JIT production. In JIT purchasing, company
planned the purchasing of goods when they received the customers order. This
method requires the company to have confidence on the supplier that they will deliver
the goods on time. The company need to have close relationship with the supplier
through long term contract.

Meanwhile, JIT production works on the demand-pull basis. The products are not made
until requested by the next process. This method focuses on eliminating all of the non-
value added activities, for example, labour hours spent producing product that are not
necessary and time setting up machine tools before they start processing. This non-
value added activities will increase the cost of the products.

These are the basic stages of JIT. First stage is when the manufacturing company
received the customer order, it is allocated immediately and processed by the
administrative staff. In second stage, materials needed are ordered from the suppliers.
This is when the manufacturer and supplier come up with contractual agreement to
ensure the materials arrive at the manufacturing plant as soon as possible. For the next
stage, as soon as the materials arrive, they are processed on the production line to
ensure there is no delay. Lastly, when the products are ready, it is directly distributed to
the customer.

JIT apply the pull method of materials flow. It is a system where the production process
starts by pulling production when it is needed. Materials are moved to the work station
and inventories are kept at the minimum level. For example, McDonalds has
implemented these two systems. McDonalds does not begin the cook process until the
customer has placed the specific order. Their food are prepared in an efficient ways
that customer wait within a reasonable amount of time. This shows that there is
reduction of waste.

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Products that are produced using JIT management approach are better in quality. As
the products are made based on customer specification, production process will only
focus on the specification and eliminates the non-value added activity without
deteriorating the quality of the product.

JIT system maintains the inventory with small lot sizes. With fewer inventories, the
company can reduce the cycle of inventory, time and space involved in manufacturing
and holding inventory. In JIT approach, inventory is considered as a liability. Inventory
allows many problems to be hidden. Hence, it becomes an interruption to never-ending
improvement. This situation often illustrate as rock in the water.

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Inventory is viewed as the water and problem as rock in the water. With enough safety
stock, the problems are covered. This means that the problems would never be solved.
In JIT system, the inventory is slowly lowered to uncover the problem so that it can be
solved as shown as on the second image. The problems are dealt a little at a time. This
approach shows JIT provides a continuous improvement.

Efficient JIT system requires frequent stock shipments with short lead times, arrive on
schedule and be of high quality. To achieve this, companies need to have close
relationship with the suppliers. It can be beneficial to both parties. The relationship will
move to clearer communication thus enabling more efficient inventory planning and
delivery scheduling by the supplier. This eventually will improve the supplier profit
margins too.

BACKFLUSH ACCOUNTING

Backflush accounting is a cost accounting system which focusing on the output and
then work backwards to recognized costs to stock and cost of sales. To simplify, the
cost associated in producing the good are recorded after the good is actually completed
or sold.

For example, Company ABC manufactures stationery. It has variety of options in

obtaining and recording the costs of it raw materials. Company ABC could order raw
materials only after they get orders from a customer. By the time Company ABC has to

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pay the invoices of the raw material ,for instance 30 days, it will have already sold the
stationery. This shows that Company ABC has use backflush accounting. They have
record the raw material cost in its cost of goods sold and finished goods inventory
accounts at predetermined point on the production process such as at the time of
completion, sale, deliveries to customer or others.

This accounting method is beneficial in eliminating a large number of transaction and

the related labour. It can measure the true and complete cost of production since the
cost are record at the end of the process. Yet, backflush accounting is not suitable for
long production process. It will take a long period of time for the inventory record to be
reduced after the completion of the products.

Backflush accounting is when you wait until the manufacture of a product has been
completed, and then record all of the related issuances of inventory from stock that
were required to create the product. This approach has the advantage of avoiding all
manual assignments of costs to products during the various production stages, thereby
eliminating a large number of transactions and the associated clerical labor.

Backflush accounting is entirely automated, with a computer handling all transactions.

The backflushing formula is:

Number of units produced x unit count listed in the bill of materials for each component

= Number of raw material units removed from stock

Backflushing is a theoretically elegant solution to the complexities of assigning costs to

products and relieving inventory, but it is difficult to implement. Backflush accounting is
subject to the following problems:

Requires an accurate production count. The number of finished goods produced

is the multiplier in the backflush equation, so an incorrect count will relieve an
incorrect amount of components and raw materials from stock.
Requires an accurate bill of materials. The bill of materials contains a complete
itemization of the components and raw materials used to construct a product. If
the items in the bill are inaccurate, the backflush equation will relieve an incorrect
amount of components and raw materials from stock.
Requires excellent scrap reporting. There will inevitably be unusual amounts of
scrap or rework in a production process that are not anticipated in a bill of
materials. If you do not separately delete these items from inventory, they will
remain in the inventory records, since the backflush equation does not account
for them.
Requires a fast production cycle time. Backflushing does not remove items from
inventory until after a product has been completed, so the inventory records will

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 remain incomplete until such time as the backflushing occurs. Thus, a very rapid
production cycle time is the best way to keep this interval as short as possible.
Under a backflushing system, there is no recorded amount of work-in-process
inventory.

Backflushing is not suitable for long production processes, since it takes too long for the
inventory records to be reduced after the eventual completion of products. It is also not
suitable for the production of customized products, since this would require the creation
of a unique bill of materials for each item produced.

The cautions raised here do not mean that it is impossible to use backflush accounting.
Usually, a manufacturing planning system allows you to use backflush accounting for
just certain products, so you can run it on a compartmentalized basis. This is useful not
just to pilot test the concept, but also to use it only under those circumstances where it
is most likely to succeed. Thus, backflush accounting can be incorporated into a hybrid
system in which multiple methods of production accounting may be used.

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 3. ADVANTAGES AND DISADVANTAGES OF JIT

The major benefits of JIT include:

If there is no demand for a product at the time, it is not made. This saves the
company money, either by not having to pay workers overtime or by having them
focus on other work or participate in training.

A company without inventory does not want a supply system problem that creates a
part shortage. This makes supplier relationships extremely important.

Supply is synchronized with production demand and the optimal amount of

inventory is on hand at any time. When parts move directly from the truck to the
point of assembly, the need for storage facilities is reduced.

Cutting setup time allows the company to reduce or eliminate inventory for
"changeover" time. The tool used here is SMED (single-minute exchange of dies).

Small or individual piece lot sizes reduce lot delay inventories, which simplifies
inventory flow and its management.

Having employees trained to work on different parts of the process allows

companies to move workers where they are needed.

While JIT has some benefits, these are matched by its potential limitations:

1. Risk of running out of stock

By not carrying much stock, it is imperative you have the correct procedures in place
to ensure stock can become readily available, and quickly. To do this, you need to have
a good relationship with your supplier(s).
You may need to form an exclusive agreement with suppliers that specifies supplying
goods within a certain time frame, prioritizing your company. JIT means that you
become extremely reliant on the consistency of your supply chain.

2. Lack of control over time frame

Having to rely on the timeliness of suppliers for each order puts you at risk of delaying
your customers receipt of goods. If you dont meet your customers expectations, they
could take their business elsewhere, which would have a huge impact on your
business if this occurs often.

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3. More planning required

With JIT inventory management, its imperative that companies understand their sales
trends and variances in close detail. Most companies have seasonal sales periods,
meaning a number of products will need a higher stock level at certain times of the year
due to higher demand. Therefore, you need to factor that into planning for inventory
levels, ensuring suppliers are able to meet different volume requirements at different
times.

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 4. THE ADVANTAGES AND DISADVANTAGES OF BACKFLUSH ACCOUNTING

Advantages:

i. Simpler method
One of the advantage of backflush is it is much simpler than other method. This is
because there is no separate accounting work in proses (WIP).

Disadvantage:

i. Delays costing process

The counting of cost is delayed until the production cycle is finished. The cost is then
applied to the product based on the manufacturing process with the hope of setting a
more precise price.

5. REAL CASE OF THE IMPLEMENTATION OF THE JUST-IN TIME TECHNIQUE.

Just-in-time (JIT) production system is originates from Japan after the World War II by
the founder of Toyota Motor Company (TMC), Ohno. The best way to survive in
automobile manufacturing is by having all the parts for assembly at the side of their line
for their use and this lead to the invention of JIT.

In order to implement JIT, Toyota restructured its factory layout. This restructuring
ensured the items flow smoothly from one machine to another due to its small lots. This
will help to eliminate transporting items back and forth to different machines. Toyota
has introduced kanban system which is the pull system in 1962 to control the flow of
items or the information on what to do that controlled all movements throughout the
factory.

There are two types of kanban in Toyota where the first one is the withdrawal kanban.
This type of kanban that details the items marked from withdrawal from the preceding
step in the process. Production ordering kanban is another type of kanban that details
the items to be produced. A part disappearing from an assembly station was the sign to
produce or order a new part. Usage of kanban help Toyota to eliminate waste of
overproduction and reduce the levels of inventory by sending signal to production on
what should only be produced and indirectly helps company to save cost.

With the aim to eliminate waste and continuously improving quality, Toyota introduced
autonomation or automating the production system and reducing the human
intervention only on detection of defects. The system helps to detects effect
automatically and will not proceed until human intervention fix the problem. This

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mean the whole production line will be stopped to fix the problems that arise.

Re-engineering machines and processes is the major initiative of the JIT. This help in
reducing the setup time required before processing of a new item. Changing stamping
dies used for body parts has been the critical retooling operation in Toyota JIT
manufacturing. The traditional re-tooling way entailed installation of die-tools one at a
time, and required adjustment by hand, with crowbars and wrenched. The installation of
a large die set took several days, during which time the production line remained shut.
To substitute the measurements for adjustments, controlling the quality of stamping,
Toyota launched The Single Minute Exchange of Die (SMED). This machine helps in
reducing the die change times dramatically and facilitated economic lot sizes of even
one vehicle.

Toyota had switch from traditional accounting system to backflush accounting system
due to the fact that Toyota adopted the principles and practices of JIT system since the
traditional accounting system conflicted with the JIT initiatives. As the backflush system
does the book at the end of the process, it only appropriate in JIT system whereby the
goods arrive at the facility only as required and are processed immediately. In other
words, accounting entries are made at the end of the process since the costs are
flushed out to the end of the process instead of being done sequentially through the
process.

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6. JIT IMPLIMENTATION IN MALAYSIA

Proton is an acronym for Perusahaan Otomobil Nasional. Proton is the Malaysias

national car manufacturing company which was founded in 1983 by the prime minister
of Malaysia, Dr. Mahathir Mohamad. Proton Holdings Berhad is one of the company in
Malaysia that adopting JIT practices. Proton however adopts JIT only for certain parts.
This is because Proton emphasis this approach as a temporary management technique
to provide some inventory and labour cost savings rather than acknowledging the
impact of JIT practices upon the total business. This is what we called as transitory JIT.

Proton used JIT in its production line. Due to the high demand of cars, method of
supplying materials, material handling at the assembly line and area of assembly at the
production line are affected. However since JIT system is hard to be implemented,
Toyota has introduced a new concept of supplying material at assembly line which is
called Set Part System (SPS), a Malaysian version of JIT. The SPS is considered as
one of the alternatives of JIT practices that used to improve the number of defect,
repair, reject and avoid missing process and wrong installation of parts.

In order to improve JIT in the production line, Proton had approved to implement SPS
as part of their kaizen (5s) effort to solve the congested problem. Standard
components racks are used as the goal of SPS implementation is to eliminate the
storage area. A number of new racking has been designed to accommodate the
materials in good arrangement. The materials are arranged based on the size of the
container and racking without following the sequence of assembly process. This will
help to reduced the space area for material storage. This new design of racking is able
to locate more empty containers compared to the previous method.

Furthermore, the task of assembly and selection are done by different operators in
order to increase the working efficiency of the operators. Before selecting the parts and
fill up the empty SPS trolley with a complete set of parts, these shopping operaters
read the information sheet as a signage of pull system or kanban by selecting the right
materials. The nonvalue added (NVA) materials were removed to the bin by the
shopping operator and materials are put in a right position on the SPS trolley. The real
task of the shopping operators is to ensure the materials are in good quality and meet
the requirement of the company before the SPS trolley push to the first station.

In conclusion, SPS implementations result in uncluttered, wider and clearer of

assembly line. It is much easier to implement 5S since all the parts and components
are organized. There a lots of benefits of implementing SPS including the reduction in
usage of racking at line side area and cost reduction. By creating clean area, wider and
well order workplace, damaged materials and parts shortage can be identified earlier
thus reduce the level of inventories.

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7. CHALLENGES OF THE JIT AND BACKFLUSH ACCOUNTING TECHNIQUES.

Just In Time

a. Business - High Coordination

Since the business has minimal or no inventory at all, it is very important for the
business to ensure that its supplies come on time. Besides, it is also important that the
manufacturing process is synchronized well, from the early stage of raw material to the
delivery stage. Thus it can be said that high coordination requires the business to invest
in advanced technology to ensure the smooth process of manufacturing.

b. Suppliers Willingly entertain short notice orders

The business will need to find suppliers who are willing to take frequent supplies orders
on short notice and in small quantities. It is best to find a local supplier, or one that is
closer in distance to the business. This will save time consumption and shipping cost,
considering that shipping will be on frequent basis.

c. Sudden increase in price of raw material

Unexpected scenarios such as natural disaster and political uproars can cause
negative supply shock, or shortage. This will result in increase of price of raw material
as supplies are limited.

d. Less advantage on getting discounts

When an entity buys in large quantity or in bulk, suppliers are more willing to offer
discounts. In JIT, materials are only bought when needed, which means, in small
amount. This limits the possibility of getting discounts.

e. Loss of individual autonomy

JIT may not be acceptable in all cultures across the globe. For the Japanese, since
they have high working commitment, it will be easier for them to adapt to the pressure
of completing a sudden demand and being commanded by their superior. For western
cultures, it may be harder for them to adapt to JIT since western countries have a
practice whereby employees are empowered to engage in the decision making process
and even given the trust to lead. This makes them to be non-receptive of being bossed
around. Aside from that, workers in JIT practices have to adapt to sudden surge in
demand without taking into consideration of their need and health.

f. Maybe industry-specific

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Certain business like craft oriented business is the better candidate for JIT while
construction or commodity business is less suitable for JIT program.

g. Resistance to change

Employees may be reluctant to change due to insufficient necessary information and

facts as to how much will the change affect them. Aside from that, employees may also
refuse to change because they may be reluctant to adapt to new technology, or the fear
of not being capable to adapt to new technology.

Back Flush Accounting

a. Not suitable for external financial reporting

Back flush accounting does not adhere to GAAP (Generally Accepted Accounting
Principal). This is due to the insufficiency of audit trails. This draws back as the effect of
delay in costing process.

8. CONCLUSION

The focus of Just in Time (JIT) is to eliminate waste by using pull method. It helps to
improve the quality of end products while using only a limited amount of inventory. This
allows the business to build close relationships with its suppliers. The advantages of
JIT are space saving and reduction of cost while its disadvantages are intensive
inventory planning is needed and the risk of running out of stock. The founder of JIT
system is none other than Japans pride and globally prestigious automotive company,
Toyota. In Malaysia, Proton is known to be adapting this practice in certain areas of its
manufacturing process.

Back flush accounting focuses on recording cost at the end of production process or
upon sales point of the goods. The advantage of back flush is that it is a simple method
while its disadvantage is its practice on delay costing.

While there are numerous advantages of JIT and back flush, some challenges have
also been identified in implementing it. Nonetheless, JIT and backflush accounting has
undoubtedly contribute in cost reduction of product manufacturing.

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Reference:

1. http://maaw.info/JITMain.htm
2. http://www.investopedia.com/terms/j/jit.asp
3. http://www.cimaglobal.com/Documents/ImportedDocuments/fm_may06_p43-
44.pdf

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