Note:
OH overapplied = favourable, underapplied = unfavourable

2. FMOH Budget Variance:

____________________________

Variable MOH Variances:

1. Static Budget Variance:

 
2. VMOH Flexible Budget Variance:

 
3. VMOH Sales Volume Variance:

 
4. VMOH Rate (Spending) Variance:

 
5. VOH Efficiency Variance:

Note: SH Allowed = Number of hours that should have been used (based on actual units and standard hours per unit)
____________________________
Additional Resources:
More information on VMOH variances can be found HERE
More information on FMOH variances can be found HERE
____________________________

 

Market-Based Pricing is based on the sales price for a comparable (identical) product by an external supplier. This would be an example of an arm’s length transaction and would be ideally used in a perfectly competitive market where the actions of one individual entity cannot influence the market price, and also when the selling division does not have any idle capacity. This method does not always work because the product being transferred might be a work-in-process that does not get traded in an active market.

 

Cost-Based Pricing is based on the variable costs incurred by the selling division to sell and deliver the goods to the buying division. This method works if the selling division has idle capacity. The downside to this approach is that there is less incentive for the division to control costs.

 

Negotiated Pricing involves a negotiation between managers of the buying and selling division. This would require a calculation of the maximum transfer price (the selling price for an external supplier) and the minimum transfer price (based on the variable costs for the selling division and any loss of contribution margin incurred from not selling some or all of the items externally).

 

Transfer pricing can be a hotly contested issue. This article outlines one of the recent landmark rulings in Canada:

 

http://business.financialpost.com/legal-post/glaxosmithkline-transfer-pricing-case-settled

The economic order quantity (EOQ) is the order quantity that minimizes total holding and ordering costs for the year. 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.

EOQ =√2DP/C

Pam runs a mail-order business for gym equipment. Annual demand for the TricoFlexers is 16,000. The annual holding cost per unit is $2.50 and the cost to place an order is $50. What is the economic order quantity?

√2*16000*50/2.50 =800 units per order

  Market rate transfer price. The simplest and most elegant transfer price is to use the market price. By doing so, the upstream subsidiary can sell either internally or externally and earn the same profit with either option. It can also earn the highest possible profit, rather than being subject to the odd profit vagaries that can occur under mandated pricing schemes.

 

  Cost-based transfer pricing. You can have each subsidiary transfer its products to other subsidiaries at cost, after which successive subsidiaries add their costs to the product. This means that the final subsidiary that sells the completed goods to a third party will recognize the entire profit associated with the product.

 

 

Negotiated transfer pricing. It may be necessary to negotiate a transfer price between subsidiaries, without using any market price as a baseline. This situation arises when there is no discernible market price because the market is very small or the goods are highly customized. This results in prices that are based on the relative negotiating skills of the parties.
http://www.accountingtools.com/transfer-pricing

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Spoilage is any output that does not meet the standards or composition desired by the entity. We can break the term down further into normal and abnormal spoilage. Normal spoilage is anticipated in a production process, whereas abnormal spoilage is unexpected and/or avoidable.

 

In a job-costing system, we also distinguish between normal spoilage common to all production (which is costed to manufacturing overhead) and normal spoilage for a specific job. Abnormal spoilage, meanwhile, is charged to an abnormal loss account.

 

Reworked units are any units that were initially unacceptable outputs, but then received additional labour/materials to become good and sellable units. Once again, a job-costing system differentiates between normal rework common to all jobs (assigned to MOH) and normal rework for a specific job (charged to the work in process control for the specific job). Any abnormal rework would be highlighted by being charged to an abnormal rework loss account.

 

Rework can be costly! While we’ve been focusing on manufacturing, below is an example of some of the costs that might arise if rework is required in production accounting itself:

 

http://www.zedi.ca/blog/the-high-cost-of-rework-in-production-accounting

Rework is that part of the final produce which has not been accepted by the client because it does not meet the required specifications. However, those specifications can be met by working on the item once again. Hence the name rework.

Spoilage is also that part of the final produce that does not adhere to the specifications given by the client and is therefore not accepted by them. The difference between rework and spoilage is that, rework will be reworked on and sold at full price whereas spoilage is considered to be defective goods and is discarded at throw away prices in the market.

Rework and spoilage are closely linked concepts. If firms have a high percentage of rework, they will also have a lot of items in their spoilage.

Rework and spoilage are additional cost for the company. Since the company is in the business to make a profit, this gets passed on to the customer in the form of additional costs. This makes the company uncompetitive in comparison to its competitors. The company with the lowest amount of rework and spoilage costs will have the least loss and hence they will be able to provide the best deal to the customer. Reducing rework and spoilage is therefore strategic in nature and must be paid careful attention to.

Job costing has created a system wherein rework and spoilage costs are allocated to the respective job where the loss is supposed to have occurred. This helps the company find out the types of jobs it is efficient and not efficient in and therefore work on reducing costs:

Read more: Transferred-In Costs Definition | Investopedia http://www.investopedia.com/terms/t/transferred-in-costs.asp#ixzz4QCJwLSuf
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Read more: Transferred-In Costs Definition | Investopedia http://www.investopedia.com/terms/t/transferred-in-costs.asp#ixzz4QCJDjKyr
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I think some of my colleagues have answered your question quite well, but I thought I’d throw in my $0.02.

 

It’s a little bit hard to find real life examples of Variable Costing in a company (but see below), since Absorption Costing is what is used for preparing external financial statements. However, you could use variable costing for your own internal decision-making. If you don’t want to continually keep track of inventory with both methods, it is possible to make adjusting calculations at the end of the year. As I learned in my first year management accounting course, you would simply take the operating income from absorption costing, subtract the fixed costs in the ending inventory, and add any fixed costs that were in the opening inventory (and subsequently sold) to get the variable costing operating income.

 

Absorption costing will produce a higher income during a period in which inventory increases form the beginning of the period. Conversely, variable costing will result in a higher income during a period in which inventory decreases, since more of the fixed costs will be “sold” with the products that are sold in the period compared to the amount of fixed cost that will be added to the ending inventory and counted as an asset on the balance sheet.

 

In terms of a real-life example, CFO Magazine published an article highlighting how Ford, GM and Chrysler were able to use absorption costing to appear more profitable by producing well above consumer demand. However, it highlights the consequences of this decision: an impact on the consumer’s perception of brand, and also fees for maintenance of so many unsold cars sitting on lots. Worth a look!

 

http://ww2.cfo.com/management-accounting/2012/02/why-the-big-three-put-too-many-cars-on-the-lot/

-  The production costs are transferred from inventory to COGS when the goods are sold and the timing of recognition of COGS is matched with the incoming revenue.

· Variable (direct) costing; This is a method of inventory valuation in which only variable manufacturing costs are included as inventoriable costs and all fixed and non-manufacturing costs are classified as period costs expensed during the specific time period they are incurred. The variable costs of production are transferred from inventory to COGS when the goods are sold. 

The main difference is that in absorption costing the fixed manufacturing costs are capitalized whereas in variable costing only variable manufacturing are capitalized as inventoriable cost 

Difference;

Standard costing uses entirely predetermined costs for all aspects of products while normal costing uses actual costs for the materials and labour components.

4. Fixed Overhead Variances

 •FOH Budget Variance = FOH Budget - FOH Actual 

•FOH Volume Variance = FOH Budget - FOH Applied

 – If under applied, then Unfavourable 

– If over applied, then Favourable

See HERE for an example

Cons:

Activity based costing is when a company looks at the major activities that it performs and assigns a cost based on those activities. Then each product is assigned costs based on the amount of each activity it uses. Some examples of companies that use ABC are: audit firms, custom furniture manufacturing... (where various costs are not incurred evenly among projects).
Pros:

Cons:

More information on both methods can be found HERE

And a video explaining some of the concepts behind ABC and traditional costing can be found HERE