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Hey Everyone, good job at dividing up the question and answering it as a team! I also like the visuals you've brought in, keep up the good work!

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Hey Oliver!
Here are all our responses for this weeks questions in one handy document! Judy has a great PDF attached to one of her posts and a good big picture review video to take a look at :)

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Oliver, if you feel comfortable with EOQ, you can practice the subject by attempting questions 2,  4, 5, 6, and 8 of the following quiz!

http://www.proprofs.com/quiz-school/story.php?title=acca-f2-accounting-for-materials

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Hi Oliver! In case you're more of a visual learner rather than a technical one, I've attached a graph below which represents EOQ. The green curve represents the total cost, the blue line represents carrying cost, and the pink curve represents ordering cost. EOQ is represented on this graph as the point where the Ordering Cost and Carrying Cost lines intersect. Coincidentally, this point on the x axis is also the point in which the Total Cost curve as at it's lowest.

In this example, by having an order quantity of 80, you are sure to minimize your total costs, at $700. If the order quantity is chosen anywhere outside of this number, your total costs would be higher. Therefore, this is why in this example, an order quantity of 80 is known as the Economic Order Quantity.

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Hi Oliver! Let me give you an example of how EOQ can be applied. Imagine that your friend Ronald runs a business that produces and ships televisions. Every year, there is a demand for 10,000 televisions. The applicable holding cost per unit is $5, and the cost of placing an order for at TV is $30. Let's put that into the EOQ formula:

EOQ = sq.rt (2DP/C)
EOQ = sq.rt (2*10,000*30/5)
EOQ = 346.41 = 346

We now know that the economic order quantity is 346, but what does that mean? It means that 346 is the order quantity that minimizes the total holding and ordering costs for the year. In turn, by minimizing the inventory to the quantity found, the company will save money which could be used to invest in other ventures, improved equipment and facilities, and more.

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A bit more complex in terms of my previous post for Min TP (Pg 9)
Here are some steps to follow to help: 1)Find CM lost on outside sales
2) Allocate total lost CM to units requested
3) Then find your Min TP
The Max TP is also stated in the example, which is basically how much the buying division is willing to pay externally (Pg 9)
-Within these pages, it also shows how the different methods of finding TP can effect Net Income (Pg 6)

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Hi Oliver, I'm here to help you understand what exactly EOQ is.
Definition
The economic order quantity (EOQ) is the order quantity that minimizes total holding and ordering costs for the year; it helps us to calculate the optimal quantity of inventory to order under a given set of assumption. Assumptions are needed because EOQ is just a model to follow off of, it won't be exact to the circumstances of any company, however, even if all the assumptions don’t hold exactly, the EOQ gives us a good indication of whether or not current order quantities are reasonable.
Assumptions
- Same quantity is ordered each time
- Demand, lead time, ordering and carrying costs are certain
- Quantity ordered does not affect the per unit cost
- No stock outs
- Cost of quality and shrinkage are only considered if they effect ordering or carrying costs
Formula
Make sure you follow this formula, Oliver! I found a few different formulas over the internet, but this is the one for this class!
EOQ = sq.rt. (2DP/C)
D is demand in units
P is ordering costs per purchase order
C is carrying costs of one unit in stock
I hope this helps you some Oliver! Just remember that EOQ is a helpful model that businesses use to make decisions on how much they should be ordering in order to reduce costs!

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From the slides from Shannon, you found out that there are a few ways to calculate the TP(Ex. cost-based:VC, Full absorption cost,etc). However, the generic way of calculating the [Min TP = VC + Opp Cost of making the sale internally].
At this site, you can find an example with simple numbers to get an easier understanding of the formula; where opp cost becomes important to keep watch when there is no idle capacity. (Find the sub heading,"Review Problem 11.8")

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FlatWorld, the world's largest publisher of open college textbooks

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Hi everybody, here is small animation of the idea of TP and its importance.

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In the Negotiated Transfer Prices, there is a range of acceptable transfer price and the maximum is the upper limit which is determined by the buying division. There is no any certain formula for the Maximum Transfer Price and it is whatever the buying division would like to pay externally.
For example, from the website: http://www.managementaccountingmastery.com/cima-p3-how-to-calculate-a-transfer-price-matts-complete-guide/
If there is a same diesel engine, and it could be bought on the open market for 800,then 800 is the maximum amount buyers would like to pay.

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Hey guys! Lets break up the questions again! I'll send out another email as that seemed to work last time! Let me know if you want to do a particular part and I'll add your name to it! Chapter 19:

1.       Explain EOQ –covered by: Emma C.

2.       Example –covered by: Dzmitry

3.       Example –covered by:Dzmitry

Chapter 21:

1.       Describe the 3 transfer pricing methods –covered by: Bruke R.

2.       Explain when each transfer pricing method should be used –covered by: Molly Halpin

3.       Calculating Minimum transfer price –covered by: Robert

4.       Calculating maximum transfer price –covered by: Xinyi

5.       Example Min TP –covered by: Judy

6.       Example Max TP–covered by: Judy

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Hey Oliver, I have compiled one document for you to use that has all of our group's examples/explanations/definitions on it for you to use. Enjoy!

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It's so great to see everyone working together to help Oliver out this week! Here's an example I found that I hope helps you out a bit more with process costing, Oliver. What I found really cool about this example is that it goes back to a lot of basic accounting before getting into the actual process of process costing. It's interesting to see how journal entries and the calculations all fit in together.
https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-ii/traditional-cost-systems/process-cost-system

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Oliver, please refer to the following links for more real-life applications of spoilage and rework. They thoroughly explains the process, with examples that further build upon the points made.

http://www.dummies.com/business/accounting/cost-accounting-job-costs-for-spoilage-reworked-products-and-scrap/

http://www.dummies.com/business/accounting/cost-accounting-how-to-allocate-rework/

After looking at the previous two links and absorbing their content, you are ready to move on to a more technical example. The following link will show you how to apply the knowledge in a technical accounting work problem involving spoilage, rework, defective units, and the like:

http://www.dummies.com/business/accounting/cost-accounting-equivalent-spoilage-included-and-excluded/

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Oliver, all this technical information might confuse you a little, so let me give you a real life example of the concepts involved in this chapter.

Imagine you are running a cake-baking business. Daily you expect that out of the 1000 cakes that are baked, 10 of them will break naturally despite your perfected process. Those 10 are part of normal spoilage, as it will occur even in the best production environments. Although they cannot be sold, their costs must still be accounted for by spreading them throughout the goods sold.

If however one day your ovens are not as efficient as they have not been properly taken care of, and 50 cakes that day do not turn out, then those ones will be abnormal spoilage. They could have been avoided, but due to improper care, they are incurred. This type of spoilage is accounted for in the Loss for Abnormal Spoilage account.

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Hi guys! I found slides that could help for CH18. It summarizes accounting for Spoilage, Rework, & Scrap using simple numbers as examples. That way you can get a basic understanding of how the number works. It also includes journal entries. What I really like is that it walks through the 5 steps for process accounting for both weighted average and FIFO.
Recall the 5 steps are: Summarize the flow of physical outputs,  computer output in terms of EU, summarize total cost accounted for, compute cost per EU, Assign total cost to: Units completed, Spoiled Units, and units in EI WIP

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Hi, Oliver, so the basic definition of Transferred-in Costs is the costs that are incurred in the previous departments that are carried forward to the next process in the production cycle.
And if there is only one department in a company, this department wouldn't have any transferred-in costs. If there is more than one department, the first department start to generate transferred-in costs.
I attached a link of definition of Transferred-in Costs below, I hope it would help.

Besides the walk through videos posted on culearn, I founded two useful videos, one is weighted average process costing with transferred-in costs (https://www.youtube.com/watch?v=2vX4CCcVbCo) and another one is FIFO process costing with transferred costs. (https://www.youtube.com/watch?v=_H22Zw0KI1M)

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What are 'Transferred-In Costs'

Transferred-in costs are costs accumulated during the upstream production processes within a company. Transferred-in costs are the costs accumulated by the product at any given point in production. They are "transferred-in" to the new business department that receives the partially finished product and is responsible for continuing the production process. Transferred-in costs combine manufacturing costs by the various departments and production processes.

BREAKING DOWN 'Transferred-In Costs'

Transferred-in costs are more often used in cost accounting for companies that produce continuous similar units through a series of operations such as petroleum, chemical, textile and food processing companies.

Example of Transferred-In Costs

If department A is responsible for starting a widget, and department B is responsible for finishing the widget, the costs incurred during production in department A would be "transferred-in costs" for department B who is responsible for continuing the production process. Transferred-in cost is also referred to as the accumulated cost of a product when it first arrives in a production department. The unit cost of a product is determined by dividing total costs charged to the production department by the output of that department.

1. Learn more about fixed and variable expenses incurred by businesses. Find out how production and manufacturing costs impact ... Read Answer >>

2. Learn about the marginal cost of production and how it is affected by changes in fixed and variable costs. Read Answer >>

3. Understand the difference between prime costs and conversion costs, and learn how each type is used in analyzing business ... Read Answer >>

4. Understand how a company uses marginal analysis in its spending decisions. Learn the benefits of marginal revenue and marginal ... Read Answer >>

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Transferred-in costs are costs accumulated during the upstream production processes within a company. Transferred-in costs are the costs accumulated by the product at any given point in production. They are "transferred-in" to the new business department that receives the partially finished product and is responsible for continuing the production process.

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Hey guys! Lets break up the parts of this week's questions and I can compile and post one document for Oliver on Friday! We don't want him to wait too long and we can improve our grade a lot by working together more and answering faster.
I thought we could break up this weeks question as follows:
Chapter 17: - Xinyi and Rob/Bobby
1. Transferred costs + beginning inventory
2. Big picture overview of how it works
3. Examples (2)
Chapter 18:
1.  What is Spoilage and Reword (Definition) - Molly Halpin
2.  Accounting for spoilage and rework in a job costing system - Bruke
3. Examples (2) - Dzmitry

If you are working on an answer to a part post a comment and I'll put your name beside it so we don't have multiple answers and no one is doing extra work!

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Let's take a look at how the concepts of Absorption and Variable costing would apply in a real life situation! Take ABC Inc for example, which manufactures and sells 10,000 units of their best selling product every year. The cost of 1 unit of this product consists of:

$10 per unit in Direct Materials,
$10 per unit in Direct Labor,
$5 in Variable Manufacturing Overhead.

Additionally, the company incurs $30,000 of Fixed Manufacturing Overhead per year. Under Absorption costing, the unit product cost would be $28:

$10 per unit in Direct Materials,
$10 per unit in Direct Labor,
$5 in Variable Manufacturing Overhead,
$3 in Fixed Manufacturing Overhead per Unit (30k/10k)

However under Variable Costing, the unit product cost would be $23 (same as above, except there is no Fixed Manufacturing Overhead per Unit). The difference here is that fixed manufacturing overhead would not be allocated on a per-unit basis in the Variable Costing method, but rather would appear as a total Fixed Costs figure after Contribution Margin has been calculated. Both methods account for fixed costs; the only difference is where it is shown in their respective income statements.

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Just to further enhance what was taught this past week about variable and absorption costing:
Absorption (Full) Costing

• Product costs are capitalized -> all variable and fixed manufacturing costs are included as inventoriable costs

• Period costs are expensed -> all variable and fixed non-manufacturing costs are classified as period costs

Variable (Direct) Costing

• Product costs are capitalized -> only variable manufacturing costs are included as inventoriable costs

• Period costs are expensed -> all fixed costs and all non-manufacturing costs are classified as period costs

One of the most helpful things I found from the week was the breakdown between the two kinds of income statements which helped to show what is explained above.
The difference that comes in income between the two kinds of costing is from the FOH that is applied to beginning and ending inventory in absorption costing - because none of the fixed costs are part of COGS in variable costing.

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This can be quite tricky, but I tend to think standard cost, as your"budgeted" cost.  Therefore like in previous practices, all manufacturing cost are applied based on predetermined rates for prices and quantities(DM, DL, & MOH). Since these calculation are estimates of cost, the difference between the applied and actual cost is none other than your variance we calculate.
Normal costing uses actual cost for DM, and DL. However, the Overhead is charged based on the predetermined overhead rate.  Hopefully this will help.

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Hey everyone, good job so far at starting to answer the question. Remember the earlier you can answer it the better for Oliver as he is still confused about the material. Emma had a good solution to effectively answer the question as a group so maybe try giving that a shot!

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The variances can be a little confusing because they are all quite similar. Variances are just measuring the differences between two things. The key to understanding these variances is looking at the title because the title can help show you what two items you are trying to find the difference between.
I found this video on YouTube to help you with your 4th question about overhead variances - especially fixed overhead. He does a pretty good job at explaining the overhead variance and giving an example to go along with it.
For a little additional help with the other variances you can go to his page on YouTube and look at videos 10.3 - 10.7 :)
Hope this helps Oliver!

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Standard Costing & Variance Analysis | Business Environment & Concepts | Miles CPA Review

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Managerial Accounting 10.8: Fixed Overhead Variance Analysis

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This video describes how to calculate the fixed manufacturing overhead spending variance and fixed manufacturing overhead production volume variance in a manufacturing environment.

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Hey guys! Oliver posed some questions to us 5 days ago and we still haven't helped him out! I think we need a game plan on how to answer some of these questions. He's looking for help on chapter 7 and 8, so I think some people should tackle the definitions to help Oliver understand what it is we're looking at right now, some people should tackle the real world examples, and then some should tackle looking up some explanatory videos on Youtube!
I hope we can all help Oliver with these questions before he gets too far behind!
And Bruke! Good job on getting a head start on the static and flexible budget question from Oliver :)

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Manufacturing is more suitable using ABC than traditional methods, and more health care providers engaged in ABC.

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Companies in some industries incorporate a variety of inputs into the creation of the goods or services they sell. They also factor in a wide range of expenses. When these companies can directly assign costs to the most appropriate item or activity, the budgeting and cost management at these firms greatly improve. This cost assignment serves as the basis of activity-based costing. Although activity-based costing originated in the manufacturing industry, several other industries now utilize this methodology.

General Description

Activity-based costing is an approach that allocates fixed overhead and administrative costs to activities, which are cost-incurring events. Activity-based costing assigns costs to those factors and activities that have a direct cause and effect relationship with a particular overhead cost. The approach then allocates the activity costs to those products or services that actually require the activities.

Manufacturing

Activity-based costing originated in manufacturing as a better method of allocating overhead costs than the traditional method of using direct labor. With the move from labor-intensive to automation and more capital-intensive facilities and processes, manufacturing firms needed a method that better suited the new operating environment. Manufacturers use activity-based costing when overhead costs make up a significant percentage of overall expenses. Manufacturers also use it when they produce product lines of varying quantity and complexity or produce a broad array of products requiring various service support levels.

Construction

In large commercial and industrial construction, many companies exhibit characteristics that warrant the use of activity-based costing. They have significant overhead, such as construction bond purchases, large equipment and machinery and skilled personnel. They also usually either have a range of complex service lines - for example, two warehouse construction projects and two office exterior renovations of different sizes - or a diverse range of projects. Through the use of activity-based costing, project estimators and supervisors can assign costs to the correct items and projects, better enabling the construction firm to be cost-competitive by project.

Health Care

For many years health care providers could simply raise their prices or offer more services to cover increasing costs. However, in recent years, Medicare, health maintenance organizations and managed care entities have capped reimbursement rates. To more closely allocate a hospital's fixed overhead costs to those services that actually utilize a higher portion of the hospital's resources, more hospitals began using activity-based costing. The dynamics of a surgical and trauma hospital - a wide range or varied, yet complex quantity -- fit the parameters for activity-based costing use.

Additional Considerations

Installing and implementing an activity-based costing system can be expensive. Therefore, it may only be cost effective to apply organization-wide in those companies with previously mentioned characteristics. However, various small companies can use activity based costing in specific instances. For example, a company may need to allocate its sales and marketing costs to determine how effective its revenue-producing staff is. Activity-based costing would help the firm make this determination.

About the Author

Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.

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What Types of Businesses Do Activity-Based Costing?

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Companies in some industries incorporate a variety of inputs into the creation of the goods or services they sell. They also factor in a wide range of expenses. When these companies can directly assign costs to the most appropriate item or activity, the budgeting and cost management at these firms greatly improve.

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The process to allocate overhead is using an estimate which in the end of a period is not going to match the exact actual overhead, and that's why being under or over applied overhead. And here is a helpful link below.

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The over or under-applied manufacturing overhead is defined as the difference between manufacturing overhead cost applied to work in process and manufacturing overhead cost actually incurred during a period.

If the manufacturing overhead cost applied to work in process is more than the manufacturing overhead cost actually incurred during a period, the difference is known as over-applied manufacturing overhead. On the other hand; if the manufacturing overhead cost applied to work in process is less than the manufacturing overhead cost actually incurred during a period, the difference is known as under-applied manufacturing overhead.

The occurrence of over or under-applied overhead is normal in manufacturing businesses because overhead is applied to work in process using a predetermined overhead rate. Predetermined overhead rate is computed at the beginning of the period using estimated information and is used to apply manufacturing overhead cost throughout the period.

The procedure of computing predetermined overhead rate and its use in applying manufacturing overhead has been described in " measuring and recording manufacturing overhead cost " article.

Recording actual and applied overhead cost in manufacturing overhead account:

Over or under-applied manufacturing overhead is actually the debit or credit balance of manufacturing overhead account (also known as factory overhead account).

Actual manufacturing overhead costs are debited and applied manufacturing overhead costs are credited to manufacturing overhead account. Actual overhead costs are debited as they are incurred and applied overhead costs are credited as they are applied to work in process. At the end of a period, if manufacturing overhead account shows a debit balance, it means the overhead is under-applied. On the other hand; if it shows a credit balance, it means the overhead is over-applied. For further explanation of the concept, consider the following example:

The debit or credit balance in manufacturing overhead account at the end of a month is carried forward to the next month until the end of a particular period - usually one year.

Disposition of over or under-applied manufacturing overhead:

At the end of the year, the balance in manufacturing overhead account (over or under-applied manufacturing overhead) is disposed off by either allocating it among work in process, finished goods and cost of goods sold accounts or transferring the entire amount to cost of goods sold account. These two methods have been discussed below:

Allocation among work in process, finished goods and cost of goods sold account:

Under this method, the amount of over or under-applied overhead is disposed off by allocating it among work in process, finished goods and cost of goods sold accounts on the basis of overhead applied in each of the accounts during the period. The following journal entry is made to dispose off an over or under-applied overhead:
When overhead is under-applied: When overhead is over-applied:
This method is more accurate than second method. The only disadvantage of this method is that it is more time consuming.

Transferring the entire amount of over or under-applied to cost of goods sold:

Under this method the entire amount of over or under applied overhead is transferred to cost of goods sold. The following entry is made for this purpose:
When overhead is under-applied: When overhead is over-applied:
This method is not as accurate as first method. Companies use this method because it is less time consuming and easy to use.

Example:

During the year 2012, Beta company started two jobs - job A and job B . Job A consisted of 1,000 units and job B consisted of 500 units. At the end of the year 2012, job A was completed but job B was in process. The information about manufacturing overhead cost applied to job A and B was as follows:

The actual manufacturing overhead cost incurred by the company during 2012 was $108,000. Out of 1,000 units in job A, 750 units had been sold before the end of 2012.

Required: Calculate over or under applied manufacturing overhead and make journal entries required to dispose off over or under applied manufacturing overhead assuming:

1. It is disposed off by allocating between inventory and cost of goods sold accounts.

2. It is disposed off by transferring to cost of goods sold.

Solution:
Calculation of over or under-applied manufacturing overhead:
In our example, manufacturing overhead is under-applied because actual overhead is more than applied overhead. The under-applied overhead has been calculated below:

Under-applied manufacturing overhead = Total manufacturing overhead cost actually incurred - Total manufacturing overhead applied to work in process

= $108,000 - $100,000

= $8,000
Journal entries to dispose off under-applied overhead:
(i). Allocation of under-applied overhead among work in process, finished goods, and cost of goods sold accounts:

(ii). Transfer of entire under-applied overhead to cost of goods sold account:

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Over or under-applied manufacturing overhead - explanation, journal entries and example | Accounting for Management

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The over or under-applied manufacturing overhead is defined as the difference between manufacturing overhead cost applied to work in process and manufacturing overhead cost actually incurred during a period. If the manufacturing overhead cost applied to work in process is more than the manufacturing overhead cost actually incurred during a period, the difference is known ...

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Hey guys, great job so far at answering the question! I like how you've brought in links from other websites as well as have examples with numbers which help explain the content even further. Make sure that all group members are trying to contribute something to help each other out when answering the questions. Keep up the good work!

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Pratt and Whitney (engine manufacturing) uses ABC to more accurately apply their overhead.

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About Pratt & Whitney Canada

Year Founded: 2000

Annual Revenues: $602 Million

Industry: Aircraft Manufacturing

Headquarters: Longueuil, PQ Canada

Object Technology Opens New Costing Horizons For Pratt & Whitney Canada

"Our manufacturing costs were killing us," says Claude Lévesque, manager costing operations at Pratt and Whitney Canada. "We knew that we had to reduce them, but first we had to determine what they actually were." Lévesque describes a typical problem for the manufacturer still using traditional "standard costing" systems that allocate large pieces of overhead to production processes, and bury essential elements of manufacturing cost. These systems not only create incorrect costs; they don't provide the costing accuracy or detail needed in today's hotly competitive business environment. It's time for a paradigm shift in costing methodology; one that measures actual costs by manufacturing process, by product, by customer, or by any other attribute that will lead to more knowledgeable management action. That paradigm shift is well under way at Pratt and Whitney, Canada.

The Canadian Operation of Pratt and Whitney leads the world in the design and production of small and medium gas turbine engines for business aircraft, helicopters, regional transportation, military trainers, utility aircraft, auxiliary power units, and industrial and marine applications. However, until recently, this company of 6000 people, in five manufacturing plants, still relied on traditional costing methods. "We needed to develop far more cost wisdom than was enabled by our traditional standard cost system," adds Lévesque.

The five P&W plants each house different manufacturing functions - engineering (Montreal and Toronto), assembly and test (Montreal, Ledbridge and Toronto), and final parts manufacture (Haifax and Montreal). Thousands of parts and hundreds of manufacturing processes go into making the seven families of Pratt and Whitney engines. P&W parts are sold as spares as well. "We do a very large spare parts business," says Lévesque, an industrial engineer with a masters degree in accounting. "But even the parts business is competitive, since many independent suppliers now sell replacement parts for our engines." Finding a way to identify actual manufacturing cost by every part and progressively roll up the costs into subassemblies, assemblies and engines seemed virtually impossible. "We needed a whole new type of costing software package," says Lévesque. "One made for complex manufacturing, with enough calculation scope to model each manufacturing process in detail, and with sufficient flexibility to accurately accumulate manufacturing costs right through to finished engine."

Objects To The Rescue

The search led the team to review and ultimately select the "Impact:3C" object-based costing software from 3C Software, in Atlanta, GA. "The architecture of most cost accounting software systems used today was created 20 or more years ago," says Peter Tezza, founder and CEO of 3C Software, and a pioneer in costing software technology. "We formed 3C Software to bring cost accounting applications to the same technology level as other distributed information software found in the many manufacturing companies," adds Tezza. "We've done that with the Impact:3C package."

Impact:3C is object-oriented costing software that provides great flexibility in its application. "We didn't have to fit into any fixed template," adds Lévesque. That was very important to us in the software selection." He offers the analogy of a word processor that lets you assemble the words you desire, rather than use a system that provides a fixed set of words from which you must choose. "We wanted to use our own words," he adds.

Developed in compliance with Microsoft standards, the software runs on the Windows 95/98/NT platforms, and provides a familiar, user-friendly interface to Windows users. Its distributed, client-server architecture is fully open to other systems. "Cost data can come from many places, and the results sent to many places" says Lévesque. "So it's important that the costing software can easily communicate with other software systems."

The result is a new type of costing software, more accommodating in managing costs, a technology that provides quick overviews and easy drill-down capability to get to great levels of detail. Importantly, this new software technology is highly modular, providing great flexibility - allowing companies to adopt their own costing methodology, tailor it to individual plants, and periodically update it as the manufacturing processes change.

"Giant Calculator" allows ABC Costing

The required costing detail called for huge calculation capability, which is provided by "CostTalk," a powerful costing-engine. "CostTalk is like a giant calculator," says Tezza, "equipped with all of the mathematical relations and calculations needed in designing a modern manufacturing costing system." CostTalk allows plants to develop the right costing model for their processes and products, using their familiar Microsoft tools as well.

"Once we found the right software tool, we knew it was practical to implement Activity Based Costing (ABC) in our plants," says Lévesque. ABC is a costing discipline used to correct the shortcomings in the over-generalized cost systems of the past. It is a means of directing an organization's costs to the manufacturing activities that required those costs to be incurred.

"We had heard from other companies that ABC had evolved beyond the point of simply developing more accurate and relevant product, process, and service costs," adds Lévesque. These firms had begun to use ABC to manage the drivers of production activity, and be the basis of major decisions on product lines, market segments and manufacturing processes. Pratt & Whitney looked to make a similar leap in company effectiveness. "Most ABC software derive their costs from the chart of accounts," says Lévesque, "whereas the Impact:3C software derives its costs from the actual manufacturing process operation, making it uniquely suited for manufacturing companies."

More than Just Accounting

To properly measure manufacturing costs, the P&W costing team studied the routing of each and every part as it passed through production, and assigned costs according to the true behavior of the process and its demand on company resources - direct and indirect (e.g. materials, machine usage, energy, inspection, documentation). "It's far more than an accounting exercise," says Lévesque. "We had to thoroughly understand each manufacturing process, in order to properly accumulate its actual costs as accurately and rationally as possible."

Each process step (e.g. sandblasting, drilling, deburring), has a different set of rules for calculating its costs, and these rules are implemented in the CostTalk engine. The resulting calculation is then automatically defined as a software object, usable in subsequent manufacturing. Step by step, each object is rolled into downstream manufacturing processes, accumulating its measure of costs along the way, and its calculations packaged as a new intelligent object. "The intelligent objects allow us to exactly replicate the machining of every part made in the plant, says Lévesque. "They accumulate the cost calculations according to the model." Hundreds of objects were defined for the many manufacturing and non-manufacturing processes. "Without the intelligent object technology, the job would have bordered on impossible, since we would have to write lines of software code for each and every manufacturing step," he adds. The result is a tailored methodology for developing each level of manufacturing cost.

The sandblasting process quickly showed the merit of ABC costing. Traditionally, overhead was applied to the sandblasting process based on the number of hours of operation. However, the cost analysis revealed that the usage of sandblasting "beads" ñ from grains of sand to almost BB size - contributed far more to the cost than the operational hours. The specific part being processed (e.g. a pin, blade or washer) strongly influenced bead usage. Overhead was reapplied according to bead usage, and costs changed significantly. "For some parts, the old standard costs were off by 100% or more," says Lévesque. Each process (grinding, deburring, sandblasting, etc.) has its own distinct methodology, resulting in tailored costing rules. Even development and depreciation costs are included in the final costs.

Lévesque provides an additional example of two manufactured parts; one is very small (a washer) and purchased then modified by P&W; one is very large (engine case) and made and tested in a running engine, a very expensive operation. The old standard costing practice used machine hours to allocate overhead, so if both parts had the same machine hours, they would get the same share of overhead, incorrectly burdening the washer with the same overhead as the engine. Now, each part carries just the direct costs and overhead that are expended in making that part.

The old way showed costs by department, while the new method reports cost by machine, which then translates easily to costs per part moving through the machine's process. "The new activity-based costing is far more representative of true cost," adds Lévesque, though it requires a conceptual shift for most managers."

"We don't rely on the standard costs at all in developing the new costing," says Levesque. Costs are derived from purchased material plus each step in the manufacturing process. All of this is calculated by the Impact:3C software, in spite of the substantial Enterprise Resource Planning (ERP) system also installed in the company. "Most ERP systems don't provide the flexibility that comes from object-oriented technology. That's why they need to be supplemented with an object-oriented costing system," adds Lévesque.

To date, the costing team has completed the lowest costing level - i.e. the two parts plants in Halifax and Montreal. These plants represent the first steps in the manufacturing process (about 450 people in each). When all levels of manufacturing have been modeled, a cost rollup can be done from the lowest activity level (the parts plant) to the highest (assembly and test plants) resulting in a finished engine. (See Figure 1) The rollup functionality consists of the measures of facility, process, material and labor required to make a specific part on a specific machine. The present work covers 5 levels of the 12 level rollup.

Valuable Side Effects

The ABC costing also shows which machines are busy and which are underutilized. "The machine-utilization data turned out to be a valuable byproduct from the process," adds Lévesque. "In the middle of this exercise, I realized that we could get capacity utilization in addition to cost with a slight reconfiguration of the model." So they changed the costing model accordingly, since capacity utilization was such a valuable piece of information.

"Once we get all of the infrastructure costs assigned, we know what it costs us to have one hour of capacity for every machine. Knowing that, we can pinpoint used and unused capacity is for each manufacturing process." 'Unused cost' is calculated each month to determine where the unused capacity lies. Conversely, costs with little or no unused capacity show where the bottlenecks may be. "Our costing models follow in accordance with the Theory of Constraints," says Lévesque. "So every month we can tell where the bottlenecks and unused capacity reside." Yield per part may also be calculated using the unused capacity costing models. Yield calculation is accomplished automatically for each part and department. "This was a real breakthrough for us, using the costing system," says Lévesque.

Since the software will handle any numeric attributes, the team decided to use it to roll up engine weight as well. "Weight is a critical variable in aircraft engines," says Lévesque, "so why not use the costing software to calculate it."

To learn more about ImpactECS and discover how it can help your company produce results, call 800-226-2036 or visit our contact page for more information.

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Success Story - Pratt & Whitney - 3C Software

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About Pratt & Whitney Canada Year Founded: 2000 Annual Revenues: $602 Million Industry: Aircraft Manufacturing Headquarters: Longueuil, PQ Canada Object Technology Opens New Costing Horizons For Pratt & Whitney Canada "Our manufacturing costs were killing us," says Claude Lévesque, manager costing operations at Pratt and Whitney Canada.

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Along what Chenyi said, using a single overhead rate can cause products to be over or under costed as the total costs aren't allocated properly. This can lead companies to charge too high of a price and lose sales, or too low of a price and not breakeven. By using ABC the companies can gain a more accurate picture of what their costs are, and assign them more accurately, and price more accurately.

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I found that problem 5-30 on the textbook explains is a great example for demonstrating how ABC costing system can be better than the tradition costing system. By switching to ABC system, the company would have a decent amount of reduction in overhead cost assigned to the contracts and would help company to win the bid over the competitors in the market. Using a single cost allocation rate causes the company over-allocating unnecessary overhead cost to the contract, increase the overall budget and furthermore lose the competition in the market.

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Hopefully this helps Oliver with over and under applied overhead! There are some links to websites that give good definitions of the terms, and a super small example. Feel free to add anything! :)

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Hey guys, so I got the ball rolling with the chapter 5 question, please feel free to add any info to it! Also anyone got any suggestions for companies that can use ABC ? Ou, I also found that on pg. 135 it really explains the over costing and under costing, with that restaurant example!

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Hey guys, don`t forget Oliver asked a question a few days ago. The sooner you can answer the better for him as he is still currently confused on the concepts!

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How's it going guys! Sorry for joining up late, been having some issues with classes but everything's been fixed now and I'm ready to roll. Do we have a facebook chat going yet?

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How's it going guys! Sorry for joining up late, been having some issues with classes but everything's been fixed now and I'm ready to roll. Do we have a facebook chat going yet?

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Is it just me, I'm having trouble playing the Oliver video

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Is it just me, I'm having trouble playing the Oliver video

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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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I am Xinyi, you guys can call me Erica. I just registered the course this week. I am in 3rd year and happy to work with all of you.

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My name is Chenyi, you can call me Annie. I'm currently in 3rd year and I'm looking forward to this new experience of learning :)

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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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Hey guys, My name is Bruke. I am in 3rd year and I'm excited to work with all of you.

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Hey guys! My name is Robert, you can call me Bobby though. I'm in 3rd year and I'm looking forward to the new experience!

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Hey guys! My name is Robert, you can call me Bobby though. I'm in 3rd year and I'm looking forward to the new experience!

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Testing...Hi Everybody! I am born and raised in Ottawa. This tool is pretty cool, really excited to try something new!

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Testing...Hi Everybody! I am born and raised in Ottawa. This tool is pretty cool, really excited to try something new!

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Looking foward working with everyone.

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I was born and raised in Ottawa too!! I'm in 3rd year :)

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Hey guys, my name is Lindsay! I'm from Ottawa, born and raised, I'm in my 4th year, and I'm looking forward to working together this semester :)

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Hey guys, my name is Lindsay! I'm from Ottawa, born and raised, I'm in my 4th year, and I'm looking forward to working together this semester :)

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Hi everyone! I'm Emma :) Looking forward to being part of this group with all of you!