Question

Backflush Costing: Variation 2

Potter Company has installed a JIT purchasing and manufacturing system and is using backflush accounting for its cost flows. It currently uses a two-trigger approach with the purchase of materials as the first trigger point and the completion of goods as the second trigger point. During the month of June, Potter had the following transactions:

Raw materials purchased	$245,000
Direct labor cost	41,500
Overhead cost	208,000
Conversion cost applied	269,750*

^*$41,500 labor plus $228,250 overhead.

There were no beginning or ending inventories. All goods produced were sold with a 50 percent markup. Any variance is closed to Cost of Goods Sold. (Variances are recognized monthly.)

Required:

Prepare the journal entries for the month of June using backflush costing, assuming that Potter uses the sale of goods as the second trigger point instead of the completion of goods. For a compound transaction, if an amount box does not require an entry, leave it blank. Prepare your entries in the following order: (a) purchase of raw materials, (b) incurrence of direct labor and overhead costs, (c) cost of sales, (d) sales revenue, and (e) recognition of the variance between applied and actual production costs.

a.
b.
c.
d.
e.

Answer 1

Answer-

Journal entries - Backflush costing
	Transaction	Account Titles and Explanations	Debit	Credit
	a.	Work-in-Process Inventory	245000
		Cash / Accounts Payable		245000
	b.		0
				0
	c.	Finished Goods Inventory	514,750
		Work-in-Process Inventory		245000
		Conversion costs (Direct labor + Overheads)		269750
	d.	Cost of Sales	514,750
		Finished Goods Inventory		514,750
	e.	Accounts Receivable	772,125
		Sales Revenue [514,750 + (50% x 514,750)]		772,125
	f.	Factory overheads (228250 - 208000)	20250
		Cost of Sales		20250
	Note: No entry is required for b.