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My name is Conrad. I transferred over from Algonquin College into 3rd year Bcom.

I hope we all have a great time working together.

Take care,

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My name is Quinn and I'm 3rd year BCom too.

(Not so) Fun facts:
I've lived in Ottawa my whole life
I'm an only child
I'm the finance director for SBSS this year

Looking forward to working with everyone.

Cheers

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I'm Dave and this is my third year of uni. I'm from Mississauga, currently living on residence here at Carleton. I like watching good stand up comedy.

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My name is Jenny and I am in 3rd year Bcom as well. I was originally an Arts major in my first year at Carleton. I am excited to work with all of you!

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Hello fellow members of group 6.

It is very interesting to see another member in the group named Dave. The funny thing is, I am also from Mississauga, living in residence (leeds) and I'm also in my third year. Hope you guys don't confuse us.

A few interesting facts about me:

I'm the Vice President for the Carleton University Badminton Team (Note: if you're interested in joining give me a shout!)

I am am working part time as a barber and will be working part time in retail at GAP.

I am looking forever to working with everyone. :)

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I'm Nicoleta. Interesting to see so many Mississaugians in our group. I grew up in Mississauga as well and in my 3rd year of Bcom.

About me:
I did my 1st year of university at Wilfrid Laurier.
Right now I work part time for the government through FSWEP.
I play volleyball and practice martial arts.

Nice to meet you all :)

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I'm Sandra. I'm in 3rd year Bcom. I'm from Oshawa. I love sports and board games.

Looking forward to working with you all :)
I'm so excited for this semester.

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I look forward to working with you all this semester. Thank you for everyone posting their introductions.  Remember that you can add different forms of media in here like videos, pictures, and links to websites that you found useful and relevant to the course matieral!

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Hi Oliver,

I’m going to get the ball rolling on your questions. I’m going to start off by giving you an example of what over applied overhead means. Now we all know that Manufacturing Overead (MOH) is budgeted for a specific period of time. A company will use a normal costing method to determine how much MOH should be applied during a specific period. For example, the company, Carleton Co. has a forklift and they determine that every hour the forklift is used it will cost them $40 in overhead. They then figure that the forklift should be used for 40 hours a week. This means that it will cost them $1,600 ($40x40hours) a week in overhead costs. Carleton Co. will allocate $1,600 to their MOH account.

At the end of the week they find that they only used the forklift for 36 hours. This will give them an actual MOH of $1,440. Wait a minute the numbers don’t add up! They are off by $160 ($1,600-$1,440). This means that Carleton Co. over applied their MOH.

Now my next colleague will tell you what under applied overhead means.

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Hi Oliver,

I am going to build on what Conrad taught you and explain the concept of underapplied overhead.

As mentioned by Conrad, a company allocates a budget for its manufacturing overhead costs for a given period of time.

Shannon also mentioned in the lecture that:

"Under normal costing, because estimates are used, at the end of the period the amount of overhead in the inventory accounts will either be too little or too much."

Keep that in mind while we do another example.

Let's say that Carleton Co. uses the same predetermined rate of $40 per hour of forklift use. In a given week they estimate it will only be used for 30 hours as it is usually a quiet week according to seasonal patterns. So, they allocate $1200 for the use of their forklift ($40 x 30hrs).

$1200 gets credited to the Manufacturing Overhead Allocated account.

During the week, they get an unexpected large order and have to move a lot of materials through the factory. The actual amount of hours that the forklift was used was 55 hours. This cost Carleton Co. $2200 in MOH ($40 x 55hrs).

$2200 gets debited to the Manufacturing Overhead Control account.

The difference between the actual MOH and the the estimated MOH is $1000 ($2200 - $1200). They assigned too little to the MOH Allocated account resulting in underapplied manufacturing overhead.

Overapplied MOH:

Overhead Control < Overhead Allocated

Underapplied MOH:

Overhead Control > Overhead Allocated

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Hi Oliver,

Regarding you question about
traditional costing and activity based costing (ABC), as we learned in Shannon's lecture,  one of the key characteristics of traditional costing is that it uses one overhead allocation rate. ABC costing, on the other hand, uses several different rates associated with their respective activities. Since only one rate is used under traditional costing, it results in a situation where costs are allocated very arbitrarily.

A general example is let’s say Carleton Co. has a project that requires three activities, maintenance, construction and design. The percentage break down of these activities used by Carleton Co. is 10% maintenance, 70% Construction and 20% Design. Evidently, the activities are in different portions and one single allocation rate might not be ideal. Let's say that Design is very expensive and Construction is actually relatively cheap. If this were a very large and costly project, it would be more cost effective. for Carleton Co. to calculate individual allocation rates under ABC for each of the three activities.

I hope this gives a very general understanding of Activity Based Costing vs. Traditional Costing. It would be very much appreciated if my colleagues help me expand on this.

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To add on to what Jenny said,

Activity based costing is much more effective when there are:

-        High overhead costs

-        Many different products

-        Complex products

Some examples of companies that would use activity based costing are:

-        Manufacturing companies

-        Construction companies

-        Health care companies

http://yourbusiness.azcentral.com/types-businesses-activitybased-costing-28437.html

-Aside-
Question to the group, I was reading the rubric for this Oliver stuff and it said: "Works as a team and builds answers together (not segmented answers and repetitive)". It mentions not being segmented, so does that mean at the end we have to combine all our answers into a google docs document or something and post it here?

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Hey guys, good job at answering the questions so far, make sure all group members are adding something to help each other out! To answer your question Dave, please keep individual comments so we can see who all has answered and when. What Shannon is referring to when she says not segmented answers and repetitive, she just doesn't want people to not read their other group members answers and continue to post the same answers. Read what your team has wrote and try to expand upon what they are saying or add examples or something along those lines. Does this help?

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Hello Everyone,
I am a late addition to the class so I would like to quickly introduce myself.
My name is Patrick and I am a graduate of the International Business program here at Carleton.  I am taking some accounting courses this fall in order to pursue my CPA.  I am from Oakville (sorry Mississauga!) but now call Ottawa my home.
Oliver, below is a short list of companies who have all successfully implemented ABC Costing.  For most of these examples there is significant literature and case studies that illustrate the effectiveness of implementing an ABC Costing system.  I have attached one article for additional reference,

General Motors
Chrysler
UPS
Safely-Kleen

https://hbr.org/1995/07/tapping-the-full-potential-of-abc

Looking forward to working with everybody!

Patrick

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Hi Oliver,

Let me start off by explaining the difference between the static budget and the flexible budget.

The static budget is also known as the master budget. The static budget is set at the beginning of a period for a specific level of output. The budget stays the same for the entire period, regardless of changes in output. Static budgets can be useful for providing businesses with fixed guidelines. They are good for businesses that operate in a relatively unchanging environment and follow stable production levels.

The flexible budget is just as it sounds. It adjusts according to changes in the actual levels of output, actual revenue and cost drivers. At the end of the period, the flexible budget shifts the budgeted revenues and costs up and down based on changes in activity. It is beneficial because it can allow businesses to respond quickly to changes in their environment. The flexible budget allows for the adaptability that the static budget cannot offer. This is especially useful for businesses in changing environments and businesses that are more complex in their operations.

I hope this helps. Next, one of my team mates will help you understand the difference between standard and normal costing.

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Hi Oliver,

To continue on were Nicoleta left off.

Standard costing a method of costing that applies predetermined rates to a process to come up with a cost for a particular item. Standard costs are usually found on initial budget as these rates are generally calculated based on previous and expected future costs. The standard cost of an item would be found by using adding the standard rates for direct materials, direct labour and a standard overhead rate to find a unit cost

Normal Costing traces all the direct costs to a particular cost object and allocates indirect costs based on a budgeted cost rate multiplied by a cost allocation quantity. Basically this means Normal Costing uses actual direct material, direct labour costs and a predetermined overhead rate to find the total cost of a unit.

Now the overall difference is that Standard Costing will give you a general idea on if you use X amount of inputs you will get X amount of outputs and it will cost you $X when you’re done. Whereas Normal Costing will say this is how much you actually used and this is how much you actually produced and it actually cost $X.

To help reinforce the idea here is a helpful link that talks about the difference between the two types of costs. http://www.accountingcoach.com/blog/normal-costing-standard-costing

When you have these two types of costs and combine them together you can start to find out how well your company is performing with different variances. These variances will be explained by a few of my group mates as there are a lot of them!

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Static Budget Variance and Flexible Budget Variance 

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Static Budget Variance and Flexible Budget Variance 

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Hi Oliver,

I will continue by explaining a few of the variances. Nicoleta already explained the Static Budget, so basically the Static Budget Variance is just the difference between your actual results and the static budget. This variance does not give us much information because it will need to be further broken down. I will only be focusing on the Flexible Budget Variance and my colleagues will help explain the other variances.

The Flexible Budget Variance is the difference between your actual results and your flexible budget amount Nicoleta also explained what the flexible budget is so you can refer back to her post in case you’ve forgotten! :) This is the difference between actual prices at actual levels of output and budgeted prices at actual levels of output. The difference (variance) that results from this comparison can either be favourable or unfavourable. A favourable result means that the operating income exceeds the budgeted amount. An unfavourable variance means the operating income will not exceed the budgeted amount.

Let me give you a brief example. In a manufacturing company for clothes, the actual units of production/sales are 1000 units, this means that the flexible budget units of production also have to be 1000 units because it has to match actual level of output. The actual variable manufacturing costs is $20 per unit, but the flexible budget variable manufacturing costs was $30. This means that $20(1000) - $30(1000) will give you $10,000 Favourable because you budgeted to pay more for variable manufacturing costs than what you actually paid. Paying less than what you had anticipated seems like a pretty favourable situation to me!

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Hi Oliver,

I know you were struggling with the FOH variances so i'll explain that and maybe someone else will continue with VOH variances.

FMOH variances are a little tricky because fixed costs generally don’t change throughout the year. I’ll try and use the example of rent through out my explanation to help you understand. Starting with why a FMOH sales variance doesn’t exist. If you rented a factory, you will have a contract and pay the same amount of rent each month. If you sell 1 unit, or 1000 units, you will still owe your landlord the same amount of rent. Therefore, the budgeted rent and the actual rent will always be equal and you will have a 0 sales-volume variance.  The same reason would apply for your FMOH efficiency variance. The amount of rent (input) you use will not vary in quantity. i.e. you cant waste some rent or have poor quality rent you can’t use.

The only 2 ways of getting a FMOH variance come from a budget variance, or a volume variance. Budget variances arise when your FOH are not the same as your actual costs. For example, you budget $1000 a month for rent for the year. In the middle of June you find out your landlord is raising your rent to $1100. At the end of the year, this will result in a budget variance because you had to pay more for rent than you originally expected. A FMOH volume variance arises when your production is different than previously expected. This will cause you FOH to change because you are now dividing the FOH over more units. Ex: your rent is 1000 per month and you produce 1000 units, normally you would apply $1 of FOH for every unit your produce. If at the end of the month you find out you produced 1100 units, you would have applied $1100 in FOH, you will have a FOH volume variance of $100.

Hope this helped!

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Hey Oliver!
I found this video to be very helpful, the guy explains and gives examples of what could happen in a typical factory that creates the different type of variances relating to material and labour. https://www.youtube.com/watch?v=zPoVUzeja8o

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Hey everyone, good job at answering the question so far! I like how you've each tried to address a different part of the question to give Oliver a great overall understanding of his questions. Good job at using examples and bringing in external sources. Remember for everyone to contribute something!

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Hi Oliver,
Variances are used to control the variation in income and expenses over a given period from the budgeted standards.
Also, Dave's variances example video helps you to understand how variations occur.

To sucessfully understand variances, the concept of flexible budget (i.e changes in the actual levels of output) is used when calculating variances. The flexible budget links the fixed budget and the actual results. The flexible budget is prepared based on the actual output and it is done retropectively.
Refer to my colleagues Nicoleta and Jenny's post for more explanation on flexible budget.

All the variances are calculated as the difference between actual results and the flexible budget amount, except Sales volume variance which is the difference between the static budgeted profit and the flexible budget profit.

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Hey Oliver!
I found this article called Why the Big Three Put Too Many Cars on the Lot (http://ww2.cfo.com/management-accounting/2012/02/why-the-big-three-put-too-many-cars-on-the-lot/) that explains how and why Ford, General Motors, and Chrysler were using absorption costing. It's an old article, because it's talking about these companies' operations from like 2005 to 2008 I think, but it is a very interesting read. The most interesting parts of article, in short, was that these big car companies were not doing so well, so they started to produce a lot of extra inventory while using absorption costing - another group member will explain absorption costing in detail - and this combo increased their short term profits by lowering their expenses and increasing their inventory value. It was unethical, and they went bankrupted.

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Hey Oliver,

On a really high level, the main difference between absorption costing and variable costing is where the fixed manufacturing overhead is placed. In absorption costing, we would generally apply FMOH at a pre-determined rate for every unit we produce as part of the cost to make the product, where as in in variable costing, we would ignore these costs until after we have found the contribution margin, then apply all of the fixed costs at once. Shannon gave us a really good summary sheet on Slide 10 on the first power point that you should check out for a more visual explanation of this if you’re still having trouble.

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Hi Oliver,
Exactly like what Quinn said, you must understand the placement of fixed manufacturing overhead in order to differentiate variable costing and absorption costing. I would like to add few points of advantages and disadvantages of both methods.
An advantage of absorption costing is that when when a company don't sell all of its manufactured goods, the expenses for those items will not show until you actually sell the them in inventory. This can improve your profits for the period. But this advantage can be misleading when analyzing a company's profitability.

An advantage of variable costing is that even though a company has not received revenues for its sold items, but the all expenses are already shown, which means it results in surplus income. A disadvantage of this is that there will be reduced income.

Oliver, hope my explanation helps you to understand the difference between the two methods and why companies may prefer one over another.

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Hi Oliver,

I hate to say this but we won’t be able to get a specific company as an example for variable costing. The reason being is that in Canada’s Generally Accepted Accounting Principles only allow for absorption costing to be used in external financial statements. The link to the article explains why this is.

http://www.investopedia.com/ask/answers/040915/how-absorption-costing-treated-under-gaap.asp

But many different industries use variable costing for internal purposes. This is to help them with cost-volume-profit analysis.

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Hello Oliver,

Conrad is correct when he pointed out that many industries use variable costing for internal purposes.  It is commonly applied common when conducting cost-volume-profit analysis.

Remember that a companies fixed costs of production remain the same within the relevant range.  As variable costing does not take into account fixed or absorption
n costs, managers may better determine the net increase in profits earned through the sale of a specific item.  When determining a company’s product mix, managers can use variable costing to determine the overall cost of keeping a product instead of relying solely on the products reported income.

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Hello Oliver,

As mentioned from Conrad, companies are not allowed to use variable costing so it will not be possible to find a company as an example who does so. However, companies do use variable costing just for internal references.

To break down some reasons why variable costing is not allowed and it does not comply with GAAP principles include; lower taxable income, and recognition for costs of product are not expensed correctly.

To further grasp an understanding of the difference between absorption of variable costing, in the textbook there is an explanation of the different methods of costing on page 329. There you will see the key differences between the two methods, and page 332 to see the difference of how those methods are reported on the Statement of Comprehensive Income. (Exhibit 9-5). Looking at the financial statement, you will also see how under variable costing it produces a lower taxable income.

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Hi Oliver,

My teammates are doing a great job explaining absorption vs variable costing. If you need additional help with it, check out this youtube video. It explains the difference between the two, gives an example, and a high level explanation of the advantages/disadvantages of both. I found the video really easy to understand. :)

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This video explains the difference between Absorption Cost and Variable Costing in the context of managerial accounting. The key functional difference between these two methods is the way in which fixed overhead is classified, and the video provides an example to illustrate how this difference leads to substantial discrepancies in the calculation of product costs, cost of goods sold, and profitability.

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Hello Oliver,
Great questions! Let’s start with a little bit of information about process costing.  In Chapter 4 we learned Job Costing, a costing process that assigns costs to job that are different or unique.  Process costing is used when a company’s products are massed produced, using a continuous production process of homogeneous products.  Each unit of product is then assigned an equal average cost.
In this process, there are three main costs that need to be tracked an accounted for- Direct Materials, Conversion and Transferred in Costs.
Transferred in Costs are the costs incurred in previous production departments that are carried forward to the next process in the production cycle.  One way to think of these costs is to treat them as “materials” contributed at the beginning of each production department.  These costs are not a beginning inventory amount, but an amount of cost coming from the prior department.
At this point I will pass this topic along to my coworkers for more explanation, I hope this helps!

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Hello Oliver,

Hopefully you already have a clear understanding of the chapter 17 thanks to Patrick's help. I will explain what is spoilage and what are the two types of spoilage.

Spoilage is an additional cost  arising from the production process where the the product does not meet the specifications given therefore becomes a waste or scrap.

There are two types of spoilage: normal spoilage and abnormal spoilage. The normal spoilage is the standard, or the inevitable amount of waste that is caused by production. For example, stamping parts on a sheet of metal would result in some metal being wasted. Another example would be unexpected cost like the fee to fix a broken down machine.

The other type of spoilage is called abnormal spoilage, which is beyond what normally a company would expect in production. In other words, if the company has a spoilage that could've been avoided, then it is an abnormal spoilage. For example, the machine operator forgot to change the machine setting, as a result, 1000 wrong models were produced.

Oliver, hope you can now distinguish between the normal spoilage and abnormal spoilage. As for rework and the rest of topics, other members will help you with them!!

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Hey Oliver!
I found a video that explains all these topics. Since no one in our group explained rework yet, you can skip to 5:32 in the video to get a understanding of it. The teacher explains what rework is and its relation to spoilage.
https://www.youtube.com/watch?v=IC_xaFDdHYY

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Hi Oliver,

To add onto what Ke Yang has already explained about spoilage, I would like to bring up a few important details to remember when accounting for spoilage. The cost of normal spoilage is included in the Cost of good units transfered out. However, the costs of abnormal spoilage (the net loss) is charged to the Loss from Abnormal Spoilage account. I thought I would mention this because when you're doing a Process Costing problem with spoilage, you need to remember that Normal Spoilage is associated with the Units Transfered Out while abnormal spoilage is not. Hope this helps!

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1- Lets start with your first question about transfer in cost. In the production process, a product go through various processes to come into final form so, at each individual production process their is some work done on the product to refine it from its previous form and the product incurred some cost at each production stage. When the product goes from process on to process two it carries some cost with it from previous department, this cost is called transfer in cost for the next department. E.g. Car assembly line has various stages until car come to final sell-able position. The cost incurred in the paint department will be carried on with the car when it moves to tire installing department.

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EOQ stands for economic order quantity, its decision making model that calculates the optimal quantity of inventory to order under a given set of assumption. It shows the point where cost to purchase the inventory and hold the inventory is optimal.

Following is the link that shows the example.
http://accountingexplained.com/managerial/inventory-management/economic-order-quantity

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Hi Oliver,

Salmon’s example is useful to see how the Economic Order Quantity is calculated.  I would like to explain a little more on this topic just to make sure you fully understand what the EOQ calculates.
Remember that the EOQ calculated is the number of units in inventory and not a cost of inventory.  This is a common misconception.  Once inventory levels fall to this number, a company has reached the optimal point where it should order more.  This optimal point realizes the lowest cost of carrying and purchasing inventory given the forecasted demand for a product.
I hope this helps clarify your questions, now I will pass this off to one of my group members to provide more examples, and explain the rest of your questions.

Patrick

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Hi Oliver,

I will briefly explain the three transfer pricing methods: 1. Market-based transfer prices, 2.Cost-based transfer prices, 3. Negotiated transfer prices.

1. The first method, market-based is regarded as the best approach to the transfer pricing problems. The transfer price is set at the market price, for example, the price from competitor or trade association. This method works best when the selling division has no idle capacity.

2. Cost-Based transfer prices uses the costs of producing to Some companies use transfer prices based on full cost, while other companies allocate variable costs.

3. Negotiated transfer pricing method sets a negotiated transfer price which comes from negotiations between the selling and buying divisions. This approach is often used when there is no discernible market price because the market is relatively small.

I will leave the details of these three methods to my group members.

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Hi Oliver,

Ke did a pretty good job of giving an overview of the pricing methods, so I’ll try and build some examples to help you. Here is a really simple problem that I created to help you understand the basics of transfer pricing.

A car manufacturing company can either buy its tires from an unrelated company for $100, or buy from its rubber department, which also makes tires. It costs the rubber department $50 in VC and $10 in FC to make the tire. How much would you pay to the other department for the tires under each Method?

Market Based Transfer:

If you used market based transfer pricing, you would pay $100 to the other department of your company for every tire you bought because this is the fair market value of the tires.

Cost Based Transfer:

Under this method, you would pay $50 for the tires, because this is the VC of the unit.

Negotiated Transfer:

Under this method you would have to calculate the minimum and maximum transfer price to start.

Min TP= $50, because the rubber division would not be willing to lo
se money on the deal

Max TP = $100, because the company would not pay itself more than if it were to buy the tires on the open market.

Therefore, the negotiated transfer price would be anywhere from $50-100.

Hope this helps you understand a little bit better the foundation of transfer pricing!

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Hey everyone, good job at answering the question so far! I like how you've each tried to build upon what your other team members have said. Keep up the good work.

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Oliver came to my office today for some help... please watch the video and work together to help him!  Here is a summary of his questions:
CH 4: understanding conceptually why there ends up being over or under applied OH (walk through the process)
CH 5: Difference between traditional costing and activity based costing & examples of companies that would use ABC.

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Hi Oliver,
I apologize for not replying to your question sooner this week! My colleagues have already done a fantastic job of explaining so I thought I would provide a cartoon that briefly explains the key difference. I hope its helpful!

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Hi Oliver,

Salman and Patrick have already explained the concept of the Economic Order Quantity (EOQ) I would like to attach a picture that gives a visual explanation of EOQ.

As you can see in the image below, EOQ is the quantity point where both the Cost of Holding and Cost of Ordering work together to yield the lowest total cost possible.

Hope the image helps!!