Batch Costing

This method is also a type of job costing. A batch of similar products is regarded as one job and the cost of this complete batch is ascertained. It is then used to determine the unit cost of the articles produced. It should, however, be noted that the articles produced should not lose their identity in manufacturing operations.

This is another form of job costing which is adopted in case of manufacturing of a large number of components of machines or of other articles. Since a large number of them are manufactured together and pass through the same process of manufacture, it is convenient to collect their cost of manufacture together. Separate job cost sheets are maintained for each batch of products. Each batch is allotted a number. Material requisitions are prepared batchwise, the direct labour is engaged batchwise and the overheads are also recovered batchwise. Cost of each component in the batch is then determined by dividing the total cost by the number of articles manufactured.

FEATURE OF BATCH COSTING

Features of batch costing system are as under:

• Batch costing is applied in industries where identical products are produced.

• A batch is a cost unit which consists of a separate, readily identifiable group of product units which maintains its separate identity throughout the production process.

• The output of batch consists of a number of units and it is not economical to ascertain cost of every unit of output independently

• The procedure is very similar to job costing:

 (a) Each batch is treated a job and costs are calculated for total batch.

 (b) On completion of production cost per unit is found as-

Cost per Unit =Total Batch cost

                          Total Units In Batch

APPLICATIONS OF BATCH COSTING

Batch costing is used for calculating total cost of each batch. Batch is small group of units which is produced for production purposes. We also identify batch of units in our production. All raw material is supplied on batch basis and other expenses are also paid on the basis of each batch.

For instance, in the drugs industry, producer will make the batch of tablets instead of producing single tablet. This will be easy to sell that batch in market. So, calculating cost of each batch, we will calculate material cost per batch, labour cost per batch and other expenses per batch. If we want to calculate cost per unit, we have to divide total batch cost with total batch units.

It is used in following industries:

 1. Manufacturing industry for readymade garment 

 2. Manufacturing industry for toys

 3. Manufacturing industry for tyre & tube

Q 1. ABC Limited manufactures ring binders which are embossed with the customers’ own logo. A customer has ordered a batch of 600 binders. The following illustrate the cost for a typical batch of 100 binders.

 Direct materials              60

 Direct labour                  20

 Machine set up               6

Design and art work       30

Prime cost                     116

Direct employees are paid on a piecework basis.

ABC Limited absorbs production overheads at a rate of 20% of direct wages cost. 5 % is added to the total production cost of each batch to allow for selling, distribution and administration overheads.

ABC Limited requires a profit margin of 25% of sales value.

The selling price for 600 binders (to the nearest penny) will be:

  A. Rs. 756

  B. Rs. 772.8

  C. Rs. 806.4

  D. Rs.  1008

Solution-

Prime cost (Rs 116 x 6)                                                         696

 Overheads (Rs 20 x 6 x 20%)                                                24      

                                                                                                720

Selling, distribution and admin overheads (180 x 5%)             36

Total cost                                                                                 756

Selling price (756/75x100)                                                  1008

Glossary terms-

Batch Production:

A production situation where production takes place in lots or batches as opposed to continuous production. Justified when rate of production exceeds the rate of demand. Determination of batch sizes and sequencing or scheduling of batches in multiple product situation are the key decisions in batch production.

Line of Balance (LOB):

A production control device effective in batch production to compare progress on each operation with the progress necessary to satisfy the eventual delivery requirements (not to. be confused with `line balancing' used for designing assembly lines in mass production).

Master Schedule-

 A. detailed product by product production plan showing the quantities of each product to be produced in each period of the planning horizon.

Material Requirements Planning (MRP):

 This is generally a computer-based system for drawing up detailed production/procurement schedules for various parts, sub-assemblies needed to meet a given master schedule of the end item. It utilises the product structure, processing, information like production/ procurement lead times and inventory status in a bid to produce the best plan.

 Parts Explosion:

A particular product is generally composed of sub-assemblies and parts which in turn could be traced to items at the next level in a typical tree-like product structure. The problem of finding the demand of all components, sub-assemblies for a given demand of the end product is referred to as `Parts Explosion' The problem could be complicated as a component or sub-assembly may be needed at different levels of the same or different end-products. 

Economic Batch Quantity (EBQ)

Meaning

 Economic Batch Quantity refers to the optimum quantity batch which should be produced at a point of time so that the Set up & Processing Costs and Carrying Costs are together optimized.

Setting up & Processing

 Costs The setting up and processing costs refer to the costs incurred for setting up and processing operations before the start of production of a batch. There is an inverse relationship between batch size and set up & processing costs.

Large the Batch size : Lower the set up costs because of few batches

Smaller the Batch Size : Higher the set up costs because of more batches

Carrying Costs

The carrying costs refer to the costs incurred in maintaining a given level of inventory. There is positive relationship between batch size and carrying costs.

 Large the Batch size : Higher the carrying costs because of high average inventory

Smaller the Batch Size : Lower the carrying costs because of low average inventory

Trade off

The optimum quantity of batch which should be produced at a point of time determined after achieving a trade off between set up costs and carrying costs.

 Such batch size is known as EBQ because annual total cost of set up and carrying is minimum at this batch size.

FORMULA 

EBQ = 

Where, E.B.Q = Economic Batch Quantity A = Annual Demand S = Set up Cost per batch C = Carrying Costs per unit per year

Ques -2

From the following information, calculate Economic Batch Quantity for a company using batch costing: Annual Demand for the components 2400 units

Setting up cost per batch RS. 100

 Manufacturing cost per unit Rs. 200

Carrying cost per unit 6% p.a.

Solution : EBQ = 

 =  `

 = 200 Units

 OPERATING COSTING OR SERVICE COSTING – TRANSPORT, HOTEL AND HOSPITAL

 Operating or Service Costing Cost Accounting has been traditionally associated with manufacturing companies. However in the modern competitive market, cost accounting has been increasingly applied in service industries like banks, insurance companies, transportation organizations, electricity generating companies, hospitals, passenger transport and railways, hotels, road maintenance, educational institutions, road lighting, canteens, port trusts and several other service organizations. The costing method applied in these industries is known as ‘Operating Costing’.

Operating Costing is also called as ‘service costing’ because this method is used in those undertakings which provide services and are not engaging in manufacturing tangible products. It is used for ascertaining the cost of operating a service such as railways, roadways, airways, hotels, nursing homes, power supply, water supply etc. In these undertakings the cost unit is a service unit which is as follows:

Undertaking                            Cost Unit

Canteen                                   per cup of tea

Cinema                                    per seat

Electricity                                per kilo watt

Hospital                                   per bed

School/College                      per student

 Transport                              per passenger kilometer/per tonne kilometer

A large amount of capital is invested in fixed assets and comparatively less Basic Cost Concepts working capital is required in these industries. Operating costing is different from operation costing. Operating costing is used to determine the cost of providing a service whereas operation costing is used to find out cost of each operation in those of industries which produce goods consisting of a number of operations.

 According to CIMA [London] operating costing is, ‘that form of operating costing which applies where standardized services are provided either by an undertaking or by a service cost center within an undertaking’.

Nature of Operating Costing:

 The main objective of operating costing is to compute the cost of the services offered by the organization. For doing this, it is necessary to decide the unit of cost in such cases. The cost units vary from industry to industry. For example, in goods transport industry, cost per ton kilometer is to be ascertained while in case of passenger transport, cost per passenger kilometer is to be computed. The next step is to collect and identify various costs under different headings. The headings used are,

 (a) Fixed or standing charges

(b) Semi-fixed or maintenance charges

(c) Variable or running charges.

One of the important features of operating costing is that mostly such costs are fixed in nature. For example, in case of passenger transport organization, most of the costs are fixed while few costs like diesel and oil are variable and dependent on the kilometers run. Because of the diverse nature of activities carried out in service undertakings, the cost system used is obviously different from that of manufacturing concern. Let us discuss the method of computing costs in various service organisations.

 Transport Organisation:

Costing in a transport industry consists of determining the operating cost of each vehicle and applying this cost to find out the cost per unit of service rendered by a vehicle. The cost unit is selected with proper care keeping in view the needs of each concern, the weight, bulk, volume and type of goods carried and distance covered in each trip. Transport undertakings include goods transport organizations as well as passenger transport organizations. The cost unit is either ton kilometer or passenger kilometer. The meaning is cost of carrying one ton over a distance of one kilometer or cost of carrying one passenger for a distance of one kilometer.

Collection of Costs:

 A log book is maintained for each vehicle to record details of trips made by the vehicle during a specified period of time. Log book is maintained usually on a daily basis. The details shown in the log book enables the management to make suitable allocation of vehicles, to avoid the duplicate trips, or to avoid idle running capacity. The log book also provides the information relating to the fuel consumed, distance travelled, no of hours travelled, chargeable kilo meters. The log book provide the data for proper allocation of cost and in this respect these may be compared with the production details available in a manufacturing concern

Classification of Costs:

The costs of a transport organisation can be classified and accumulated under the following heads:-

(a) Fixed or stand-by costs: These costs which include garage charges, insurance, taxes, license, depreciation, wages of drivers, cleaner’s salary, establishment cost of workshop and office. Out of the above some of the costs are directly identifiable for each vehicle such as license fee and some are apportioned such as office expenses

 (b) Maintenance Charges: These costs are in the nature of semi-variable nature includes expenditure on maintenance, repairs, tyres, tubes and other charges.

 (c) Operating and Running costs: These costs are variable in nature, includes fuel, lubricating oil, wages of drivers / cleaners (if paid on per trip / kilometer).

These costs can be easily identifiable with each of the vehicle. Significance of Operating or Running Costs:

(i) Control of operating and running cost and avoidance of waste of fuel and other consumable material. (ii) Cost of running own vehicles may compared with the hired or other forms of transport.

(iii) Facilitates quotation of hiring rates to outside parties who ask for the transport service.

(iv) If transport service is treated as a separate department or service cost center, the costs to be charged to the requesting department may be easily determined.

 (v) Suitable information is obtained for efficient routing of vehicles.

(vi) Cost of idle vehicles and lost running time is easily obtained.

There are two warehouses for storing finished goods produced in a factory. Warehouse ‘A’ is at a distance of 10 kms. and Warehouse ‘B’ is at a distance of 15 kms from the factory. A fleet of 5 tonne lorries is engaged in transporting the finished goods from the factory. The records show that the lorries average a speed of 30 kms. per hour when running and regularly take 40 minutes to load at the factory. At warehouse ‘A’ unloading takes 30 minutes per load while at warehouse ‘B’ it takes 20 minutes per load. Drivers’ Wages, depreciation, insurance and taxes amount to Rs.18 per hour operated. Fuel oil, tyres, repairs and maintenance cost Rs. 2.40 per kilometer. You are required to draw up a statement showing the cost per tonne kilometer of carrying the finished goods to the two warehouses.

Statement showing computation of total cost and cost per tonne kilometer of carrying finished goods to warehouses:

Particulars	A	B
Time for travelling Time for loading Time for unloading	40 Min 40 Min 30 Min	60 Min  40 Min 20 Min
	110 Min	120 Min
Cost of Insurance, wages, tax, etc. [(110/60) x 18]                                                               [(120/60) x 18]	33.00	36.00
Fuel & oil etc. (20 x 2.4) (30 x 2.4)	48.00	72.00
Total Cost	81.00	108.00
Tonne Kilometers (5 x 10) (5 x 15)	50.00	75.00
Cost per tonne KM	1.62	1.44