coconut64
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Hi,

I have only started learning about accounting not long ago, so I'd like some help please. I have worked out the overhead recovery rate to be £1.75 since the total DLH is 600000. However I am unsure about the next step since I don't really get the concept of batch costing. The answer states that the rate of the batch and total number of batch is worked out but what do they do? What does the rate of batch tell us?

Q . https://imgur.com/a/HA1to
Many thanks.
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DJKL
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Re allocating o/head cost by number of batches:

Divide the number of units to be made for each product by the units per batch for each, this gives a total number of batches to be run re each product re the expected output of each unit.

Take the overhead cost and divide by total number of batches ( total all three products) to get a cost per batch.

Take the cost per batch and divide by units per batch to get o/h rate per unit produced re each.

Add that to prime cost for each.

Compare with result you got using step 1 approach.

The logic when discussing with the board is your argument that all the cost actually comes setting up the batch rather than the running period, hence splitting overhead by number of batches is more appropriate than by say labour hours, or certainly that is your argument as given.

I think this is correct but as I really have done no cost accounting since 1985 I am a tad rusty, if you have a model answer check with it as I may totally have this wrong.
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DJKL
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Having run the numbers it comes out:

X1 84 batches
X2 12 batches
X3 16 batches

so total 112 batches

overhead £1,050,000
Therefore cost per batch £9,375

so o/hd per unit

X1 £9.38 (1000 units per batch)
X2 £6.70 (1400 units per batch)
X3 £3.91 (2400 units per batch)
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coconut64
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(Original post by DJKL)
Re allocating o/head cost by number of batches:

Divide the number of units to be made for each product by the units per batch for each, this gives a total number of batches to be run re each product re the expected output of each unit.

Take the overhead cost and divide by total number of batches ( total all three products) to get a cost per batch.

Take the cost per batch and divide by units per batch to get o/h rate per unit produced re each.

Add that to prime cost for each.

Compare with result you got using step 1 approach.

The logic when discussing with the board is your argument that all the cost actually comes setting up the batch rather than the running period, hence splitting overhead by number of batches is more appropriate than by say labour hours, or certainly that is your argument as given.

I think this is correct but as I really have done no cost accounting since 1985 I am a tad rusty, if you have a model answer check with it as I may totally have this wrong.
Thank you so much. Your answers are correct. For the highlighted part, do you mean you should always calculate the rate of batch when information about the batch unit is given?

Thanks.
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DJKL
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(Original post by coconut64)
Thank you so much. Your answers are correct. For the highlighted part, do you mean you should always calculate the rate of batch when information about the batch unit is given?

Thanks.
No, our made up accountant has deduced in this particular circumstance that the critical factor re overheads is the number of batches run through the factory, he may not be right and this certainly will not always be the case. We have no knowledge why he has come to this conclusion only that he has, for all we know apportioning overheads by the number of left handed employees could be just as valid.

However I suspect re exam questions if you are given this data the question will hint it wants you to play using it/ do the question by two approaches and compare.

Overhead absorption can be structured on nearly anything, labour hours spent on each product, floor space occupied by an assembly line re each product.

I have never been that happy (in the real world) re fixed costs being fixed, often they are semi variable or could be variable but with high frictional costs/lead times- e.g. smaller factory might lead to lower rent and rates.

You probably want to read some books on cost accounting to see the myriad ways that might be adopted to absorb overheads into the cost of each unit's production, at the end of the day it only starts to become of critical importance when you start basing business decisions on the numbers produced

Now to caveat all of that, I am not a cost accountant and have never been one, so caveat emptor.
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