BM2209

BATCH COSTING AND PROCESS COSTING

Batch Costing
Batch costing is used by companies that make custom products. This system produces goods in similar
units (referred to as batches).
The following are the unique features of batch costing:
 Batch-wise cost collection. It involves assigning batch numbers and associated costs for each
product group.
 Identical products. It involves indistinguishable items produced in a batch.
 Grouping. It involves classifying items for costing.
In batch costing, it is crucial to determine the number of units to produce. The optimum size of the
batch is termed “economic batch quantity.” The need for economic batch quantity arises when the
production rate exceeds the sales turnover rate.
The two (2) main elements associated with economic batch quantity are as follows:
 Set-up cost. These are costs incurred for setting up tools and machines for each batch. It is a fixed
amount per batch. It is incurred irrespective of the batch size. The total set-up cost increases if
there is an increase in the number of batches.
 Carrying cost. It is also known as storage costs. It consists of the interest on capital, defective
work, storage loss, obsolescence, premium, etc. Carrying cost is considered as a rate per unit.
There will be an increase in carrying or storage costs followed by a decline in set-up costs if there
is an increase in the batch quantity.
The Economic Batch Quantity (EBQ) is the point where storage costs equal the set-up costs. At this
point, the total costs are at a minimum level. EBQ is based on production costs, set-up costs, storage
costs, the interest rate on capital, product demand, labor skills, wastage of materials, etc.
EXAMPLE: Xenon Ltd. is the major supplier of R-103 speakers to ABC Radio. It supplies 12,000 units of
speakers per annum to the radio company. It is estimated that the cost for holding the inventory for
each speaker is P0.10 monthly, while the set-up cost in manufacturing the speakers is P162 per run.
PROCEDURE:
1. Calculate the economic batch quantity:
2 × 𝑆𝑒𝑡 − 𝑢𝑝 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑏𝑎𝑡𝑐ℎ × 𝐴𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑
𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝐵𝑎𝑡𝑐ℎ 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = √
𝐴𝑛𝑛𝑢𝑎𝑙 𝑠𝑡𝑜𝑟𝑎𝑔𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

2 × 162 × 324 × 3,888,0

12,000 12,000 00 = √3,240,000 = 𝟏, 𝟖𝟎𝟎 𝒖𝒏𝒊𝒕𝒔
=√ =√ =√
0.10 × 12 1.2 1.2

𝐴𝑛𝑛𝑢𝑎𝑙
2. Calculate the number of batches per annum:
12,000
𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑢𝑛𝑖𝑡𝑠 = 𝟔. 𝟔𝟔 𝒐𝒓 𝟕
𝑁𝑜. 𝑜𝑓 𝑏𝑎𝑡𝑐ℎ𝑒𝑠 𝑝𝑒𝑟 𝑎𝑛𝑛𝑢𝑚 = =
𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑏𝑎𝑡𝑐ℎ 1,800 𝒃𝒂𝒕𝒄𝒉𝒆𝒔
𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑢𝑛𝑖𝑡𝑠

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3. Calculate the interval between two (2) consecutive optimum runs:

𝐼𝑛𝑡𝑒𝑟𝑣𝑎𝑙 𝑏𝑒𝑡𝑤𝑒𝑒𝑛 𝑡𝑤𝑜 (2) 𝑐𝑜𝑛𝑠𝑒𝑐𝑢𝑡𝑖𝑣𝑒 𝑜𝑝𝑡𝑖𝑚𝑢𝑚 12 𝑚𝑜𝑛𝑡ℎ𝑠

𝑟𝑢𝑛𝑠 =
𝑁𝑜. 𝑜𝑓 𝑏𝑎𝑡𝑐ℎ𝑒𝑠 𝑝𝑒𝑟 𝑎𝑛𝑛𝑢𝑚
12
= = 𝟏. 𝟕𝟏 𝒐𝒓 𝟐
𝒎𝒐𝒏𝒕𝒉𝒔 7
Process Costing
Process costing determines the product cost at each manufacturing operation, process, or stage. It is
generally suitable for firms where goods or services result from continuous or repetitive operations or
processes.
Process costing is used in the industries below:
1. Manufacturing industries that produce iron and steel, textiles, glass, cement, rubber, soap, paper,
food, etc
2. Mining industries that produce coal and oil
3. Public utility services that provide generation of electricity and water supply
4. Chemical industries
The following are the features of process costing:
 Costs flow from one process to another. It involves costs relating to direct material, direct wages,
and factory overheads which are charged to the process accounts.
 Average unit cost consumption. It involves calculating the average cost per unit by dividing the
total costs by the output in a period.
 Not distinguishable. In process costing, the products are not distinct in the processing stage.
 Normal spoilage. In process costing, the cost of normal spoilage or wastage is included in the cost
of the total units produced.
 Equivalent production computation. In process costing, the incomplete units at each stage of
production are converted into equivalent production based on the degree of incompleteness.
EXAMPLE: Stellar Wine Company crushes grapes to be used in winemaking. The company’s production
process involves two (2) stages: crushing and packaging. In February of 201A, the company produced
50,000 gallons of wine. The company's management wants to determine the product cost per gallon for
each stage of manufacture for their produced wine.
The following data is available:
Operating expenses Amount
Grapes purchased P100,000
Grape press maintenance 25,000
Packaging supplies 75,000
Packager labor 50,000
Normal spoilage (gallons loss in the process) 10,000

PROCEDURE:
 Step 1. Determine the relationship between the firm’s production stages and operating expenses:

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Stages of production Operating expenses

Crushing Grapes purchased
Grape press maintenance
Packaging Packaging supplies
Packager labor
 Step 2. Determine the net production volume by deducting the cost of normal spoilage from the
production volume.
𝑁𝑒𝑡 𝑣𝑜𝑙𝑢𝑚𝑒 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 = 𝑉𝑜𝑙𝑢𝑚𝑒 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 − 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑛𝑜𝑟𝑚𝑎𝑙
𝑠𝑝𝑜𝑖𝑙𝑎𝑔𝑒
= 50,000 − 10,000 = 𝟒𝟎, 𝟎𝟎𝟎
Key points: Normal spoilage (or losses) must be considered in the computation of production volume
to determine the total correctly and per unit cost of the whole process. In this case, for every 50,000
gallons of grapes processed, 10,000 gallons were wasted and thus giving a 20% normal spoilage rate.
 Step 3. Calculate the cost per unit for direct materials and conversion costs for each stage of the
production process.
Stages of
Operating Cost per gallon
production Amount (Operating expenses/Net volume of production)
expenses
Crushing Grapes purchased P100,000 P2.5 direct materials
Grape press
25,000 0.63 conversion
maintenance
TOTAL P3.13 Total Crushing
Packaging Packaging supplies 75,000 P1.88 of direct materials
Packager labor 50,000 1.25 conversion
TOTAL P3.13 Total Packaging
 Step 4. Calculate the total cost associated with each stage of production.
Stages of production Cost per unit
Crushing P3.13
Packaging 3.13
TOTAL P6.26
Key points: The total cost associated with crushing and packaging wine per gallon Stellar Wine
Company produces is P6.26.

References:
Aisha, P. (n.d.). Service costing: Definition and application and formula.
https://study.com/academy/lesson/process-costing-definition-examples.html
Bilant, S. (n.d.). Process costing: Definition & examples. https://study.com/academy/lesson/process-
costing-definition-examples.html
Lalitha, R. & Rajasekaran, V. (2010). Costing accounting. Pearson.
Rante, G. A. (2016). Cost accounting. Millenium Books, Inc.

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