Example of batch costing

Example of batch costing - Why there are Differences in...

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Why there are Differences in Costing arise when an ABC system replaces a Traditional Cost System? When an ABC system replaces a traditional cost system, high volume products generally end up costing less and low volume products end up costing more than under the traditional system. The reasons for this are as follows: Under traditional costing , all overhead costs are assigned at the per unit level (e.g. per DLH). Therefore, any product that has more units of the base used for allocating overhead (e.g., DLH’s), will get assigned more cost. This is also true of batch level costs like machine set-up cost, and any other costs which are not driven by the number of DLH’s but by some other activity units. However, the problem is particularly a problem for batch type costs like machine setup costs. Under traditional costing, these costs are usually assigned to products on a unit level basis as one component of the single plant-wide overhead rate (based on estimates done at the beginning of the year). If batch sizes are the same for all products, this is not an issue. However, if batch sizes are smaller for low volume products and bigger for high-volume products, then this is a problem. This has the effect of assigning set-up costs to all products regardless of the size of a batch or the number of batches actually run for a given product. All that matters is the number of units produced in terms of the allocation base (like DLH’s) for a given product. As a result,
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This note was uploaded on 03/03/2012 for the course ACCT 2460 taught by Professor Farrar during the Winter '12 term at Conestoga.

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Example of batch costing - Why there are Differences in...

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