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During the period, the Company: A backflush system compatible with full absorption costing appears in Exhibit Note that the direct materials purchases and conversion costs are charged directly to Cost of Goods Sold. Then the costs remaining in the ending inventories are charged, or backflushed, to the RIP, Conversion Costs and Finished Goods accounts.
Although this simplified system is somewhat unorthodox, the amount of cost of goods sold is exactly the same as the amount obtained in a traditional full absorption costing system. Although the accounts are different, the results are the same. A backflush system compatible with direct costing appears in Exhibit An additional account is needed for period costs, or factory expenses, since the fixed overhead costs are not charged to the inventory.
Instead, the fixed manufacturing costs are charged directly to expense. A backflush system compatible with throughput costing is presented in Exhibit In this illustration, only direct materials costs flow into cost of goods sold, while all conversion costs are charged directly to expense.
The Conversion Costs account that appears in Exhibits and is omitted in Exhibit because no conversion costs are deferred in the inventory. A system where none of the manufacturing costs are deferred in the inventory could be designed in a variety of ways.
This is not a backflush system, since none of the costs are flushed back to inventory accounts. Instead it might be referred to as a no-absorption throughput costing system since the ending materials costs are charged to expense rather than backflushed to the RIP and finished goods accounts.
Summary of Key Ideas Although the concepts illustrated above are more fully developed in subsequent chapters, this four part example was presented to introduce a troublesome behavioral aspect of inventory valuation.
A key idea to grasp is that although full absorption costing satisfies the matching concept, it tends to motivate managers to produce excess inventory.
Because even though total fixed manufacturing costs are relatively constant, each unsold unit soaks up some of these fixed costs. As a result, the fixed costs associated with these units appear on the balance sheet as an asset, rather than on the income statement as an expense.
The higher the level of production, the greater the amount of fixed costs deferred in the inventory, the lower the amount of expense and the greater the amount of net income. Thus, critics contend that absorption costing rewards managers for producing excess.
Direct costing, on the other hand, is neutral as far as building inventory is concerned because fixed manufacturing costs are expensed regardless of the number of units produced. Note that this lack of bias, or neutrality towards producing excess is more consistent with the JIT philosophy.
However, the throughput costing approach goes a step further and penalizes those who produce excess by charging the conversion costs associated with the unsold inventory to expense.
The no-absorption throughput method in Exhibit maximizes the penalty for producing excess and completely reverses the full absorption costing bias. Process Oriented Performance Measurements As we shall see in the chapter on standard costing, traditional performance measurements at the cost center level place emphasis on variance analysis for material, labor and overhead.
The emphasis is on measuring labor efficiency and resource utilization by comparing budgeted costs with actual costs.
JIT systems de-emphasize or eliminate variance analysis, particularly at the department level, because it tends to reduce cooperation between departments and motivate managers to produce excess inventory. We will postpone our discussion of the criticisms of traditional standard cost systems until Chapter The criticisms are mentioned here to highlight one of the main differences between traditional performance measurements and JIT measurements.
Just-in-time measurements tend to emphasize a few key non-financial aspects of performance that are process oriented, rather than the financial results oriented measurements that are generated by the accrual accounting system.
The purpose of the process oriented approach is to target the causes of a cost, or other performance result, rather than the cost, i. Graphic displays of such measurements can be quite revealing when used as a guide to continuous improvement.
Some examples of these measurements are provided below. JIT Measurements for Purchasing. Vendor percentage of on time deliveries. Days of materials inventory on hand.Turnitin provides instructors with the tools to prevent plagiarism, engage students in the writing process, and provide personalized feedback.
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