CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A.

AGRAWAL

CHAPTER-8
UNIT AND BATCH COSTING

TABLE OF CONTENTS:
1. Unit / Single / Output Costing
2. Batch Costing
3. Practical Problem
4. Past Exam Theory Questions

1. UNIT / SINGLE / OUTPUT COSTING

MEANING:
Unit refers to ‘Individuality’ or ‘a single piece’. This method of costing is used where the finished goods i.e. the
output produced by an entity is specifically identifiable. It is used in case of identical products entailing
identical cost. Unit costing is also known as Single or Output Costing but these are sub-divisions of unit costing.

INDUSTRIES WHERE USED:

This method of costing is used by those industries whose products large in size and are produced either
individually or in a lot of identical units and the cost of each unit can be specifically ascertained. For example:

1. BMW Motors Ltd., Chennai is currently manufacturing the BMW 5 Series

(Model 520d Luxury Line model) cars on its assembly line. The entire
assembly line is loaded to manufacture identical units. Now, each unit under
manufacturing, contains a sheet, which contains the details about various
materials used on that unit, time spend by various categories of labor on
that unit and stage of it’s completion, etc. Based on this one can ascertain
the actual cost of an individual unit.

2. The Boeing Company, is an American multinational corporation that

designs, manufactures and sells airplanes, rotocrafts, rockets, etc. In the
image, you can see that the company’s assembly line is loaded with lot of
commercial airplane Boeing 737 aircrafts. Now, the amount of various types
of materials used and time spent by different category of labors can be
specifically identifiable and therefore, cost of an individual unit can be
ascertained.

3. Unit costing can also be used by those industries, whose products may not
have large physical substance, but being identical they are produced in lots
like – Diamond Rings produced in the factory of D’damas Dubai. Every
single unit produced (even-though same in design) will have some minute
variation (in milligram) in weight of gold/platinum used and minute
variation (in cents) in weight of diamond. Thus based on weight of metal
and diamond, cost can be ascertained individually.

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4. Other examples includes such industries, where unit cost is ascertained on the basis of Total Cost. Like -
INDUSTRY TYPE COST UNIT
Bricks Per 1,000 Bricks
Cement per tonne
Steel per tonne
Coal per tonne
Paper per tonne
Breweries per litre

COST ASCERTAINMENT:

COST ASCERTAINMENT

FG are manufactured in Individuality FG are manufactured Identically

(AS A UNIT) (IN A LOT)

Product Cost Sheet is Cost per unit =

prepared
(As discussed in Chapter-6)

2. BATCH COSTING

MEANING:
Batch costing is a form of job costing in which a batch of identical products is taken as the cost unit. Job costing
is concerned with the costing of jobs that are made to customer’s particular requirements, whereas batch
costing is used where articles are manufactured in definite batches and are held in stock for assembly of
components to produce finished product for sale to customers. Thus in preparing component parts of radio
sets, watches, vehicles etc. batch costing is extensively used.

The costing procedure in batch costing is similar to job cost system. A number is allotted for each batch.
Material requisitions are priced in the cost department and material cost is allocated to the relevant batch.
Time sheet or job card is prepared to show the time spent on each batch. The costing of material requisitions
and time sheets has follows the normal job costing principles. Overheads are absorbed on suitable basis. If the
batches are repetitive the costing work is simplified.

INDUSTRIES WHERE USED:

This method of costing is used by those industries whose products are ‘Large in Volume’. For example:

1. Dr. Reddy’s Laboratories Ltd., is manufacturing a lot of an anti-allergic

tablets. A Tablet – which is their output or finished good is very small in
physical substance as an individual unit and therefore, it can neither be
manufactured as a unit nor can its cost be ascertained in unit. Therefore,
they are manufactured in large volumes, say a lot of 1,00,000 tables. Now, it
is irrelevant to calculate a unit cost and therefore, cost of entire lot is
calculated.

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CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A. AGRAWAL
2. A Stud manufacturing company is engaged in manufacturing stud of a
special length and diameter for an automobile manufacturing company.
Again, stud being a product with very small physical substance is
manufactured in lot of larger volumes and therefore, its cost is ascertained
on lot basis.

CONCEPT OF ECONOMIC BATCH QUANTITY:

As and when production is done in batches, selecting an appropriate ‘Batch Size’ is a critical decision to achieve
the proper cost control. Under Batch Costing, total production cost mainly comprises of –

(a) MACHINE SET-UP COST: It is a one-time cost incurred initially when a machine or an equipment is
prepared for production. Once the machine is operational, no further set-up cost is incurred. Now, if batch
size is higher, set-up cost per unit will be less and vice versa. Therefore, Machine Setup Cost is
inversely varied with batch size. For E.g. A locomotive diesel engine when started, consumes approx..
350 liters of diesel, which is sufficient for 100 Kms. or 2 hours of running. That means it consumes 3-4
times more fuel than its average fuel consumption.
(b) INVENTORY HOLDING COST: Producing in higher batch quantities could result in more inventories piling
up. It will further increase the need to maintain adequate inventory of raw material. This could result in
increased costs due to huge working capital invested in inventory, storage cost, risk of loss due to
spoilage/theft, etc. High batch size would result in high Inventory Holding Cost i.e. carrying costs and vice
versa. Therefore, Inventory Holding Cost is directly varied with batch size.

Therefore, it is necessary to find out an

optimum batch size which will involve
minimum cost and yield maximum profit.
This is the economic or optimum batch
quantity.
A commonly used formula to arrive at
optimum batch quantity is –
2 DS
=
C

D = Annual demand of the product

S = Set up cost per batch
C = Carrying Cost per unit per annum (at a defined rate of interest)
Example:
Annual usage of a component = 4,000 units
Set up and order processing cost = Rs. 50 per batch
Annual rate of interest = 10 %
Cost of manufacture per unit = Rs. 100
2  4,000 50
Economic Batch Quantity = = 40,000
10% of 100
= 200 units

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3. PRACTICAL PROBLEMS

Q1. Unit Costing - Basic Question REG. PAGE NO.

The following data relate to the manufacture of a standard product during the 4-week ended 28th
February 2018:
Ram Material Consumed Rs. 4,00,000
Direct Wages Rs. 2,40,000
Machine Hours Worked 3,200 Hours
Machine Hour Rate Rs. 40/Hour
Office Overhead 10% of Works Cost
Selling Overheads Rs. 20/Unit
Units Produced and Sold Rs. 10,000 at Rs. 120 each
You are required to find our cost per unit and profit for the 4-week ended 28th February 2018.

Q2. Unit Costing – SP, FC,VC,SVV REG. PAGE NO.

Atharva Pharmacare Ltd. produced a uniform type of drug and has a manufacturing capacity of 3,000
units per week of 48 hours. From the records of the company, the following data are available relating to
output and costs of 3 consecutive weeks.

Week No. Units Manufactured Direct Material Direct Wages Factory Overheads

1 1,200 9,000 3,600 31,000

2 1,600 12,000 4,800 33,000

3 1,800 13,500 5,400 34,000

Assuming that the company charges a profit of 20% on selling price. Find out the selling price per unit
when the weekly output is 2,000 units.

Q3. Unit Costing REG. PAGE NO.

Wonder Ltd. Has a capacity of 120,000 Units per annum as its optimum capacity. The production costs
are as under –
Direct Material Rs. 90 per unit
Direct Labour Rs. 60 per unit
Fixed Overheads Rs. 30,00,000 per annum
Variable Overheads Rs. 100 per unit
Semi Variable OH Rs. 20,00,000 per annum upto 50% capacity and an extra amount of
Rs. 4,00,000 for every 25% increase in capacity or part thereof.
The production is made to order and not for stocks. If the production programme of the factory is as
indicated below and the management desires a profit of Rs. 20,00,000 for the year work out the average
selling price at which each unit should be quoted.
First 3 months 50% capacity
Remaining 9 months 80% capacity

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Q4. Unit Costing REG. PAGE NO.
A Company is manufacturing building bricks and fire bricks. Both the products require two processes -
Brick - forming and Heat - treating
Time requirements for the two type of bricks are -
Building Bricks Fire Bricks
Forming per 100 bricks 3 hours 2 hours
Heat treatment per 100 bricks 2 hours 5 hours
Total cost of the two departments in one month were -
Forming Rs. 21,200
Heat Treatment Rs. 48,800
Production during the month was -
Building Bricks 1,30,000 Nos.
Fire Bricks 70,000 Nos.
Prepare a statement of manufacturing costs for the two varieties of bricks by apportioning the costs in
proportion of time taken to produce actual output.

Q5. Unit Costing REG. PAGE NO.

SK Engineering Company Limited manufactures two types of auto bearing – type ‘XD’ and type ‘XE’. The
company’s records show the following particulars for those bearings for the month of May, 2018 :
(Rs.)
Direct Materials 38,10,000
Direct labour 20,10,000
Production overheads 6,03,000
Office Overheads 6,42,300
There was no work-in-progress at the beginning or at the end of the month. It was ascertained that:
(i) Direct material cost per bearing for type ‘XD’ was 160 percent of those for type ‘XE’.
(ii) Direct labour cost per bearing for type ‘XE’ was 40 percent of those for type ‘XD’.
(iii) Production overheads were absorbed on the basis of direct labour cost.
(iv) Office overheads were absorbed on the basis of factory cost.
(v) Selling and distribution overheads were Rs. 2 per bearing sold for each type.
(vi) Stock of finished bearing on 1st May, 2009 was 15,000 bearings @ Rs. 15 of type ‘XD’ and 20,000
bearings @ Rs. 8 of type ‘XE’.
(vii) Production during the month of May, 2018 was 2,70,000 bearings of type ‘XD’ and 3,30,000
bearings of type ‘XE’ and out of May’s output 25,000 bearings of type ‘XD’ and 40,000 bearings of
type ‘XE’ would be remains in stock on 31st May, 2018 which valued at cost of production.
You are required to:
(i) Prepare a statement showing cost of production each type of bearings.
(ii) Prepare a statement showing the selling price at which the bearings would be marketed, if the
company desires @ 20 percent profit on selling price.

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Q6. Batch Costing – Basic Problem REG. PAGE NO.
Arnav Confectioners (AC) owns a bakery which is used to make bakery items like pastries, cakes and
muffins. AC use to bake at least 50 units of any item at a time. A customer has given an order for 600
muffins. To process a batch of 50 muffins, the following cost would be incurred:
Direct materials Rs. 500
Direct wages Rs. 50
Oven set- up cost Rs. 150
AC absorbs production overheads at a rate of 20% of direct wages cost. 10% is added to the total
production cost of each batch to allow for selling, distribution and administration overheads. AC requires
a profit margin of 25% of sales value. Determine the selling price for 600 muffins.

Q7. Batch Costing – Basic Problem REG. PAGE NO.

A jobbing factory has undertaken to supply 200 pieces of a component per month for the ensuing six
months. Every month a batch order is opened against which materials and labour hours are booked at
actual. Overheads are levied at a rate per labour hour. The selling price contracted for is Rs. 8 per piece.
From the following data present the cost and profit per piece of each batch order and overall position of
the order for 1,200 pieces.
BATCH OUTPUT MATERIAL COST DIRECT WAGES DIRECT LABOUR
MONTH
(UNITS) (RS.) (RS.) HOURS
JANUARY 210 650 120 240
FEBRUARY 200 640 140 280
MARCH 220 680 150 280
APRIL 180 630 140 270
MAY 200 700 150 300
JUNE 220 720 160 320

The other details are –

CHARGEABLE EXPS. DIRECT LABOUR
MONTH
(RS.) HOURS
JANUARY 12,000 4,800
FEBRUARY 10,560 4,400
MARCH 12,000 5,000
APRIL 10,580 4,600
MAY 13,000 5,000
JUNE 12,000 4,800

Q8. Batch Costing – Ascertainment of Profitability REG. PAGE NO.

Lakshya Limited undertakes to supply 1,000 units of a component per month to ABC Ltd. for the months
of January, February and March 2018. Every month a batch order is opened against which materials and
labour cost are booked at actual. Overheads are levied at a rate per labour hour. The selling price is
contracted at Rs. 15/- per unit.

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CA – INTERMEDIATE: COST & MANAGEMENT ACCOUNTING BY CA. CS. ANSHUL A. AGRAWAL
From the following data, present the cost and profit per unit of each batch order and the overall position
of the order for the 3,000 units, assuming that excess output is sold to other customers in same months.
BATCH OUTPUT MATERIAL
MONTH LABOUR COST (RS.)
(UNITS) COST (RS.)
January 2018 1,250 6,250 2,500

February 2018 1,500 9,000 3,000

March 2018 1,000 5,000 2,000

Labour is paid at the rate of Rs. 2 per hour. The other details are:

MONTH OVERHEADS TOTAL LABOUR HOURS

January 2018 12,000 4,000

February 2018 9,000 3,000

March 2018 15,000 5,000

Q9. Batch Costing – EBQ REG. PAGE NO.

From the following information, determine the Economic Batch Quantity (EBQ):
Monthly Demand for a product 500 Units
Setting-Up Cost per Batch Rs. 60
Cost of Manufacturing per Unit Rs. 20
Rate of Interest 10% P.A.

Q10. Batch Costing – EBQ REG. PAGE NO.

M/s. KBC Bearings Ltd. is committed to supply 48,000 bearings per annum to M/s. KMR Fans on a steady
daily basis. It is estimated that it costs Rs. 1 as inventory holding cost per bearing per month and that the
set-up cost per run of bearing manufacture is Rs. 3,200.
(i) What would be the optimum run size of bearing manufacture?
(ii) What would be the interval between two consecutive optimum runs?
(iii) Find out the minimum inventory cost?

Q11. Batch Costing – EBQ REG. PAGE NO.

A Company has an annual demand from a single customer for 50,000 litres of a paint product. The total
demand can be made up of a range of colour to be produced in a continuous production run after which a
set-up of the machinery will be required to accommodate the colour change. The total output of each
colour will be stored and then delivered to the customer as s single load immediately before production
of the next colour commences.
The Set up costs are Rs. 100 per set up. The Service is supplied by an outside company as required. The
Holding costs are incurred on rented storage space which costs Rs. 50 per sq. meter per annum. Each
square meter can hold 250 Litres suitably stacked.
You are required to calculate
(i) Calculate the total cost per year where batches may range from 4,000 to 10,000 litres in multiples
of 1,000 litres and hence choose the production batch size which will minimize the cost.
(ii) Use the economic batch size formula to calculate the batch size which will minimise total cost.
.

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Q12. Batch Costing – EBQ REG. PAGE NO.
X Ltd. is committed to supply 24,000 bearings per annum to Y Ltd. on a steady basis. It is estimated that it
costs 10 paise as inventory holding cost per bearing per month and that the set-up cost per run of
bearing manufacture is Rs. 324.
(a) What would be the optimum run size for bearing manufacture?
(b) Assuming that the company has a policy of manufacturing 6,000 bearing per run, how much extra
costs the company would be incurring as compared to the optimum run suggested in (a) above?
(c) What is the minimum inventory holding cost?
(d) What would be the interval between two consecutive optimum runs if EBQ is followed?

Q13. Batch Costing – EBQ REG. PAGE NO.

A customer has been ordering 90,000 special design metal columns at the rate of 18,000 columns per
order during the past years. The production cost comprises Rs. 2,120 for material, Rs. 60 for labour and
Rs. 20 for fixed overheads. It costs Rs. 1,500 to set up for one run of 18,000 column and inventory
carrying cost is 5%.
(i) Find the most economic production run.
(ii) Calculate the extra cost that company incur due to processing of 18,000 columns in a batch.

4. PAST EXAM THEORY QUESTIONS

Q1. Write a short note on Economic Batch Quantity. What are the factors to be kept in mind while
deciding an optimum batch size?
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“Give Tough FIGHT to Negativities within you, It’s just the matter
of Beginning. It’s always hard to Begin”. -ANSHUL A. AGRAWAL
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