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Total X Y Z
The sum of material costs (X), Labour costs (y) and overheads costs (z)
represents the amount of costs incurred in carrying out the job.
Costing method to be put in place by the firm may therefore be mu costs
involved.
Example one
Arc Company manufactures timber products and most of them pass
through two distinct departments A&B. the company has just received
an order from one of its customers who has ordered for a dining table. In
attempt to meet his order, a Management Accountant managed to
estimate the following costs that are expected to be incurred.
Department A Department B
Materials 1,500 units at 250/= 1,200 units at
each 3,000/=each
Labor costs 1000 hours at 200/= 5000 hours at 150/= @
each
The amount that can be charged to the client can be calculated as under;
Selling Price = Cost + Mark-up
Margin = 1/5, therefore Markup=1/4
Selling price = 3,835,000 +1/4 x 3,835,000
Selling price = 3,835,000 + 958,750
Selling price = UGX 4,793,750
Batch costing method
This is a form of a specific order costing used where identical items or
articles are manufactures as a batch or in a group. Instead of one unit
been made in response of a customer’s responses , a batch of identifiable
units is produced.
A batch is treated as a job during the process when batch is being
processed.
A batch in this case is treated as a cost unit and the cost of each
identical unit that constitutes a batch is determined by dividing total
batch cost by the number of units in a batch as shown below;
Unit Cost = Total Batch Cost
Number of Units in a batch
In attempting to apply this costing techniques. The unites involved must
be identical and production should consist of a limited repetitive work.
Since it is a form of specific technique, the batch is made to meet
customer’s specific. The approach is applied in foot and ware industries,
brick making factories, clothing industries among others.
Example:
Mat limited, dealers of timber products, received an order from team ltd
for 2,000 benches of the standard size. Mat limited estimated that the
following cost could be incurred if the order is to be met.
Materials
Timber 400 meters @ 20,000/=
Nails 200kgs @ 4,000/=
Vanish 10 liters @ 25,000/=
Labor costs: workers to be got from two departments i.e A&B.
Dept. A, 100 labor hours @ 5,000/=
Dept.B, 30 men working for 10 days at the rate of 2000/= per day per
man
Variable overheads
Dept. A, are absorbed on the basis of direct labor hours at rate of 3000/=
@.
Dept. B. are absorbed as 20% of prime costs required for the order.
Fixed manufacturing Overheads
Fixed manufacturing cost per bench is 400/=
Required: Assuming the company would process it as batch number of
10.
a) Determine the cost unit of each bench.
b) What price would be charge to Team Ltd per Bench if, Mat ltd
targets gross profit 25% profit on cost.
c) What price would be charge to team ltd per Bench if, Mat ltd
targets gross profit 25% profit on sales.
Suggested solutions
Costs of batch number 10 0f 2000 benches
Materials cost UGX UGX
Timber 400 meters x 2,000/= 800,000
Nails 200kgs x 2,500/=
Vanish 500,000 1,550,000
10 liters X 25,000/= 250,000
Labor costs
Department A 100 hours X 5,000/= 500,000
Department B 30 men X 10 days x 600,000 1,100,000
2,000/=
Prime costs 2,650,000
Variable costs
Department A 100 hours X 3,000/= 300,000
Department B 20% X 2,650,000 530,000 830,000