Question

Backflush versus Traditional Costing: Variations 3 and 4

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	$243,000
Direct labor cost	41,500
Overhead cost	207,750
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 60 percent markup. Any variance is closed to Cost of Goods Sold. (Variances are recognized monthly.)

Required:

1. Prepare the journal entries for the month of May using backflush costing, assuming that Potter uses the completion of goods as the only trigger point. For a compound transaction, if an amount box does not require an entry, leave it blank. Prepare your entries in the following order: (a) completion of goods, (b) cost of sales, (c) sales revenue, and (d) recognition of the variance between applied and actual production costs.

a.
b.
c.
d.

2. Prepare the journal entries for the month of May using backflush costing, assuming that Potter uses the sale of goods as the only trigger point. For a compound transaction, if an amount box does not require an entry, leave it blank. Prepare your entries in the following order: (a) completion and sale of goods, (b) revenue from sales, and (c) recognition of the variance between applied and actual production costs.

a.
b.
c.

Answer 1

Account Title & Explanation Debit Credit 19 Conversion Cost Control 20 a 243,000 Wages Payable Accounts Payable 41,500 21 22 207,750 23 Finished Goods Inventory 24 512,750 Accounts Payable Conversion Cost Control 243,000 25 26 269,750 27 Cost of Goods Sold 28 b 512,750 Finished Goods Inventory 29 512,750 30 Accounts Receivable (512750+512750*60%) 31 c 820,400 Sales Revenue 32 820,400 33 Conversion Cost Control (269750-243000) 34 d 26,750 Cost of Goods Sold 35 26,750 36

41 2) Account Title & Explanation Conversion Cost Control Debit Credit 42 43 a 243,000 Wages Payable Accounts Payable 44 41,500 45 207,750 46 Cost of Goods Sold 47 512,750 Accounts Payable 48 243,000 Conversion Cost Control 49 269,750 50 51 b Accounts Receivable (512750+512750*60%) 820,400 Sales Revenue 52 820,400 53 Conversion Cost Control 54 C (269750-243000) 26,750 Cost of Goods Sold 55 26,750 56 57 58 59 60