·      The method is used as a part of a continuous review inventory process, where the level of inventory is monitored at all times and a specific amount is ordered each time until the level reaches a specific re-order point

·      The demand, ordering costs and carrying costs are certain. The purchase order lead time, which is the time between the placement of an order and its delivery, is also certain as well

·      Purchasing costs per unit are unaffected by the quantity ordered. This assumption makes purchasing costs irrelevant to determining EOQ since purchasing costs of all units acquired will be the same

·      No stockouts occur. Since stockouts are prohibitively high and we assume that to avoid these potential costs, the organization always maintains adequate inventory so that no stockouts will occur

·      In deciding the size of the purchase order, the management team considers the cost of quality and shrinkage only to extent that these costs affect ordering or carrying costs

In this case D is the demand for a certain period, P is the ordering costs per purchase order and C is the carrying cost of one unit in stock for that certain demand period.

 

Variable costing tends to limit the issues which are derived from absorption costing, such as the fact that income tends to rise as the inventory production increases. Both of these costing methods treat Fixed Manufacturing Overhead differently. Under absorption costing, FMOH is treated as a product costs, while under the variable costing method FMOH is treated as a period cost.

 

Part 1/2: Explain Economic order Quantity (EOQ)- Hristijan

 

Part 2/2: Provide examples for EOQ- Cindy and Farid

 

 

 

Part 1/5: describe Market based transfer pricing method and explain when it should be used – Michaela

 

Part 2/5: describe Market-based transfer pricing method and explain when it should be used – Rowan

 

Part 3/5: describe cost-based Transfer pricing method and explain when it should be used – Paula

 

Part 4/5: Provide an example for how to calculate the minimum transfer price – Ishaan

 

Part 5/5 - Provide an example for how to calculate the maximum transfer price - Moriah

 

Reworked units are the units of product that were initially rejected due to their inability to meet client requirements but have now been worked on again and are ready to be sold to the customers at full price.

 

For a more in-depth explanation of rework I would suggest checking out the following link: https://www.managementstudyguide.com/spoilage-and-rework-in-job-order-costing-system.htm

If abnormal spoilage occurs, it is recorded as a cost of the period and  net losses are charged to the Abnormal Spoilage Account

 

1.     What are Transferred in costs? (Basic definition plus a bit more details gathered from different sources) – Part 1 / 4 is assigned to: Cindy

2.     List some relevant examples of transferred in costs (Make sure that these examples are detailed and applicable) – Part 2/4 is assigned to: Farid

3.     How are Transferred in costs different from beginning inventory? (You need to make sure that Oliver clearly understands the difference between the two terms) – Part 3/4 is assigned to: Michaela

4.     How to deal with them in the bigger process costing problems? (You can use an example from the textbook / work assigned within the class or simply discuss a step by step process of what needs to be done) – Part 4/4 is assigned to: Corey

 

1.     What is spoilage? / What spoiled units are? (Basic definition plus a bit more details gathered from different sources. You can also discuss how units are inspected for any defects before they are sold.) – Part 1 / 4 is assigned to: Moriah

2.     What is rework? / What are reworked units? (Basic definition plus a bit more details gathered from different sources. You can also discuss how this is different from spoilage) – Part 2 / 4 is assigned to: Ishaan

3.     How do you account for spoilage within a job-costing system? (This includes how to account for the magnitude of spoilage costs, as well as normal and abnormal spoilage) – Part 3 / 4 is assigned to: Paula

4.     How do you account for rework within a job- costing system? (This includes what are the three types of rework and potentially include some examples which ties everything together.) – Part 4 / 4 is assigned to: Rowan

Please let me know if you have any questions / concerns with how the work has been assigned.

Thanks,

Hristijan V

Businesses that pay employees by billable hours (the amount of hours they work not a salary) are more likely to use variable costing especially if their employees also receive sale commissions. Examples of such business include any retail store or car dealerships. I know Future Shop/Best Buy previously utilised this model. Labour intensive businesses such as construction companies, landscapers and mechanics may also select this model. 

Another area of business that may employ this model is the manufacturing business. Manufactures incur a lot of different variable costs during the production of articles. Variable costing is more likely to be utilised with more specific products rather than mass produced articles. Some examples include computer parts, production of a car (from design to trials and then production) and, in a small business, making jewellery.  

Michaela (1/2) + Corey (2/2)

-----------------------------------------

Feel free to get creative and use videos and pictures, or anything else to help drive the point home :)

The static budget, the flexible budget and the rate variance all give you the same answer!Fixed costs are not changing when the volume of outputs change meaning the static and flexible budget amounts would be the same. All three of the variances are looking at the difference between the actual and budgeted costs. With the actual costs all being the same and the budgeted costs (your unchanged fixed costs) being the same, you will end up with the same variance. Isn’t that interesting? This is typically called the FMOH budget variance. 

The following two variances are not calculated:

·Sales Volume Variance: Fixed costs are unaffected by changes in the sales volume meaning, there is no change in the static and fixed budget (we just learned that)

· Efficiency variance: Similar to the sales volume variance, if we have fixed costs, how can we go about make them more or less efficient? The answer is we can’t. These costs are not changing with the different quantities utilized because they are fixed for the relevant range. 

That doesn’t seem too bad. Now we’ve made it through all the variances we know. Sadly, there is one more and it’s called the volume variance. The volume variance examines the difference between the actual FMOH incurred and the FMOH applied. This is similar to under/over applied overhead so it will be a piece of cake. To calculate this variance, the FOH allocated to actual outputs multiplied by the Budgeted FOH rate (amount applied) is subtracted from the Budgeted FOH (fixed costs you expected to incur). This is very similar to what we did with job costing. Just like job costing, a FMOH rate will have to be found. This is done by taking the budgeted overhead costs divided by the budgeted quantity of allocation base units. You should be able to find this no problem based on your previous knowledge! With variance, it’s important to know whether it is favorable or unfavorable. Here is a trick to remember how to allocate the overhead: “UN”der applied = “UN”favourable and over applied= favourable.

To sum it all up, in regards to FMOH: 

· Sales Volume variance and Efficiency Variance aren’t to be calculated as FMOH costs remain constant no matter the fluctuation in units 

· The static budget variance, flexible budget variance and the rate variance all give you the same variance and are called FMOH Budget Variance

· New variance: Volume variance is the difference between the actual FMOH you incurred and the FMOH you applied

 

Gathering and analyzing the variance data based on the Standard costing method is quite valuable for managers since they are able to evaluate the day-to-day business operations, and identify key issues within the organization. If the company has implemented standard costing, then it is easy for the organization to identify any variances, drill down till the lowest level and figure out which employees or activities are responsible for the deviation from the standards.

This method should be utilized when market prices are available, there is a competitive market for the product and the company is operating at capacity. 

Beginning inventory, Work in progress (WIP) contains the items that have not been completed and must be worked on further. Example: If you’re putting a chair together and you only have three legs, you will have to wait for a fourth leg to complete the process. Your semi-finished chair will be in your Beginning WIP tomorrow as you don’t have that fourth leg. 

Transferred in costs are the costs associated with incomplete products. These products are moving from department to department to go through the required process to be completed. Transferred in costs helps us track associated costs of production as the units moves through the process. Farid has an excellent diagram that should help you see how transferred in costs move though production. 

Just remember that Beginning WIP is whatever we couldn’t finish, whereas transferred in costs are the costs associate with the units that are moving from one department to another in order to undergo all required process  to be completed (example: we are now painting(department 3) the assembled item (department 2) which was originally individual parts (department 1)). 

If it’s just beginning inventory of the product overall (ie chairs), remember that beginning inventory contains completed products from a previous period where as transferred in costs are going to be recorded in inventory after they are completed in the current period.

Transferred-in costs are basically the costs incurred as a result of switching the processing of a product/service from one department in a company, to another.  These costs are treated as a separate type of direct material added in the beginning of the process.  In the real world, companies that continuously create similar products, through a series of operations, are the types to utilize transferred-in costs. Think food processing companies, or companies that produce textiles or chemicals! Below are two YouTube videos which explain how transferred-in costs work!

 

I would like to apologize for not responding in a timely manner and assure you this won’t be happening again.

 

- Ishaan

A great example of businesses using absorption costing is the automobile industry. Ford, General Motors, and Chrysler all used absorption costing that let them assign all of their costs to the total number of products made. This encouraged the automobile makers to produce more and more cars to offset their costs and temporarily boost financial performance. They however did not take into account that they would also need to sell all those cars in order to actually make a profit and this ended up harming the firms in the long run.

Assuming the fixed costs of sales and production remain the same for a given period of time. Managers who consider variable costing to sell additional units during a specific time frame add to the company's bottom line in sales and profits because the units do not cost the company more money to produce. Variable costing does not take into account fixed or absorption costs; therefore profits are likely to increase by the amount earned through the sale of the additional item.

Product Offerings
Managers use variable costing to determine which products to offer and which products to discontinue. Rather than discontinuing a product based on negligible profits, a manager can use variable costing to determine the overall costs of keeping a unit in production.

If a company offers four products and decides to discontinue two, the two remaining products have to absorb higher overhead expenses. Variable costing illustrates the impact that discontinuing a product has on all costs related to production. When considering variable costing, managers logically see that keeping a particular unit in production helps absorb fixed costs and maintain overall profitability.

Variable costing systems simplify the estimation of product and customer profitability. Rather than analyzing data hidden by costs that would exist whether a unit is produced or not, variable costing allows managers to analyze data based on the actual cost of production. Understanding the actual cost of each unit allows managers to reduce variances between actual and budgeted amounts, which often means controlled costs and higher revenues for the organization.

Accuracy
Most organizations do not produce or sell the same number of units each period. Because sales fluctuate, managers could make poor decisions based on obscured data, unless they use the most appropriate costing system. Variable costing helps managers with irregular sales patterns more accurately determine the cost of production during a given period.

Example) If sales patterns are comparable each year

Sales increase during the winter months and decrease during the summer months. Managers can use variable costing data to approximate future costs of production.

Summary of Advantages of variable costing
Variable costing shows your profits after all the bills have been paid for the accounting period. Though you may not have received revenues for the products you manufactured because some could be in inventory, you show that you have paid all of your expenses for the period. When you finally sell the finished products in inventory, you have surplus income.

Summary of Disadvantages of variable costing
Variable costing shows full payment for fixed-overhead expenses for the accounting period. Even if you don’t sell all the products you make, you must deduct the full cost of fixed overhead. This means you show less profit for the period because you show your complete overhead expense even when you haven’t sold all of your products. You show reduced income because of unsold products but full expenses for overhead.

Companies that should use absorption costing are those who sell products that aren’t always sold in the same accounting period as it’s being created. Companies that manufacture products that do not sell quickly and aren’t  quickly replaceable should use this approach.  

 

Part 1 – Q1 (Moriah #1 and Farid #2)

 

Part 2 – Q2 (Chris #1and Paula #2)

 

Part 3 – Q3 (Cindy #1 and Corey#2)

 

Part 4 – Q4 (Ishaan #1 and Michaela #2)

 

The # is displayed because, when you post, you should specify your #. For example, Ishaan would title his post: Question 2 – Part 4 (1/2). Titling this properly is essential!

If someone responds to Ishaan’s post, they could title it Response to Question 2 – Part 4(1/2), Ishaan – XXXX, or really anything that will get his attention. This titling is not as critical. 

 

After some time for collaboration and editing posts, I’ll make a cumulative post with 1-4 answered with the best sum of the parts. Of course, if anyone wants to see changes to that post as well let me know.

Sales Volume Variance = (Flexible Budget Amount - Static Budget Amount)

For Variable Overhead:
VOH Flexible Budget Variance = (Actual Cost - Static Budget)

VOH Sales Volume Variance = Flexible Budget- Static Budget Amount)

For Fixed OH:
FOH Budget Variance=  (Actual Fixed Cost - Flexible Budget variable cost)

Level 3)
For DM and DML:
Rate/Price Variance = (Actual Selling price - Budgeted Selling price) * Actual units sold

Efficiency Variance = (actual Quantity of Input used - Budgeted quantity of input allowed for actual output of units achieved) * Budgeted rate of input

For Variable Overhead:
VMOH Rate/Spending Variance= (Actual Rate - Standard Rate)* Actual Quantity

VOH Efficiency variance = (Actual Quantity - Standard Quantity)*Standard Rate

For Fixed Overhead:
FOH Rate Variance = (Actual Fixed Cost - Flexible Budget variable cost)

FMOH Volume Variance =Budgeted FOH - (FOH allocated to actual output - Budgeted FOH rate)

Level 4)
For DM and DML
mix variance = (Actual Input mix % - budgeted input mix %) *actual quantity of inputs used * budgeted rate

yield variance = (actual quantity of inputs used - Budgeted Quantity of inputs allowed for actual output of units achieved) * Budgeted input mix % * Budgeted rate of input

 

Overhead Variances consist of both fixed manufacturing overhead variances and variable manufacturing overhead variances, and can be used to reconcile the actual overhead with the applied overhead. This can be done by taking the sum of: (VOH Rate Variance) + (VOH Efficiency Variance) + (FOH Budget Variance) + (FOH Volume Variance)

I believe we have 9 members (correct me if I'm wrong):

 

-Cindy

-Corey

-Hristijan

-Paula

-Michaela

-Moriah

-Farid

-Ishaan

-Rowan

 

 

We each have an assigned role.

Question = when Ms.Butler posts (we have completed 'Question 1')

Part = division of question tasks

 

Part-Creator: each week this person reads the Helping Oliver Question (promptly!) and breaks it down into 1-8 smaller parts (preferably 8 if feasible). After all the parts are submitted and sufficient discussion has taken place, the PC combines the parts into one ultimate answer titled 'Oliver Question X - Cumulative' (Chris' idea - and a good one!)

If divided into only 2 parts, 4 members would each do the same part, if divided into 4 parts, 2 would each do the same part, etc. (and then collaborate)

Example of what the part-creator could do for Week 1:

 

CH4

1.    Give a basic explanation of why there ends up being over and under applied overhead? 

2.    Give a detailed explanation of why there ends up being over and underapplied overherhead.

3.    Give an example of when a company underapplies overhead.

4.    Give an example of when a company overapplies overhead

CH5

5.     Give a basic explanation of the difference between ABC and traditional costing

6.     Give a detailed explanation of the difference between ABC and traditional costing

7.     Give an example of a company using traditional costing

8.     Give an example of a company using ABC costing

Of course, any member could ask to change any of the 8 parts if they can think of a part that could be asked more appropriately/logically. You could title this 'Issue re: Question X - Part X', for example (or anything that will get the attention of the part-creator). It would then be the duty of the part-creator' to change the part and/or reply to the member. 

Everyone else:  You answer your assigned part (and respond to other's parts)

For example, if Moriah was #1, she would post a title of  'Question 1 - Part 1' with her response in the body:

Basic explanation: At the end of a period, there ends up being over- or under- applied overhead because of the difference in the budgeted amounts of overhead and the actual amounts of overhead.

If someone wanted to respond or elaborate on Moriah's post, such as if I wanted to ask: "What is overhead?" then I would title the post: 'Response to  Question 1 - Part 1.' (or, say, 'Response to Moriah'), titling doesn't matter so long as you can get through to person you're responding to

...

After reading responses to your part, you could edit elements and/or create new sections...

For example, Moriah could edit her post so that it now said:

Basic explanation: At the end of a period, there ends up being over- or under- applied overhead because of the difference in the budgeted amounts of overhead and the actual amounts of overhead.

AND

Rowan's Question: Overhead is the overall indirect cost of manufacturing. 

...

 

Although excellent individual work, I think we’re giving Oliver (aka Julia, Shannon, and ourselves) a bit of information overload/redundancy this week.

 

I say everyone has a part they have to do, and if you want to do more (or, preferably, respond to another's Part), go for it! (just make sure you label your assigned part in the title)

I believe the benefits members would get from this approach include:

-A lighter workload
-More in-depth, concise information (i.e accessing a specific part of a question that you're having the most trouble with more easily)
-Greater clarity and communication
-Elimination of role-conflict and role-confusion (everyone has a specific responsibility)

Please let me know what you think of my proposal. To make things easier, if you are replying to this message, can you please start your title with ‘Rowan – XXXXX’