Just in Time and Backflush Costing

A. Just-in-Time Purchasing

Just-in-time (JIT) purchasing is the purchase of materials (or goods) so that they are delivered just as needed for production (or sales). Consider Hewlett-Packard’s (HP’s) JIT purchasing: HP has long-term agreements with suppliers of the major components of its printers. Each supplier is required to make frequent deliveries of small orders directly to the production floor, based on the production schedules HP provides them. The suppliers work hard to keep their commitments because any failure on their part will result in HP’s assembly plant not meeting its scheduled deliveries of printers.

B. Just-in-Time (JIT) Production

In contrast, JIT production is a “demand-pull” approach, which is used by companies such as Toyota in the automobile industry, Dell in the computer industry, and Braun in the appliance industry. Just-in-time (JIT) production, which is also called lean production, is a “demand-pull” manufacturing system that manufactures each component in a production line as soon as, and only when, needed by the next step in the production line. Demand triggers each step of the production process, starting with customer demand for a finished product at the end of the process and working all the way back to the demand for direct materials at the beginning of the process. In this way, demand pulls an order through the production line. The demand-pull feature of JIT production systems results in close coordination among workstations and smooths the flow of goods, despite low quantities of inventory. JIT production systems help companies meet the demand for high-quality products on time and at the lowest possible cost.

C. Backflush Costing

Journal Entries and General Ledger Overview for Backflush Costing and Journal Entries for Sequential Tracking with Three Trigger Points: Purchase of Direct Materials and Incurring of Conversion Costs, Completion of Good Finished Units of Product, and Sale of Finished Goods

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