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John Moffat.
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Natasha1996
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Is there any difference between batch units and batch size in ABC?
When we are given batch size then we need to calculate the number of batch in units like this:
# of batch in units = Production units / Batch size
Total batch units = Batch units of product A + Batch units of product B
We need to take the total number of batch in units as a cost driver to absorb the overheads. However, if we are given batch units then we simply take total batch units as a cost driver to absorb overheads to each product?
John Moffat
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The batch size is the number of units in each batch.
The number of batches is the total production divided by the batch size.
We do not talk of ‘batch units’ – it is either the batch size (which is in units of whatever we are producing) or it is number of batches.
Natasha1996
- Topics: 34
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[Question]
For example, if we are two products with the following information.Products——————-Product A——-Product B
Production units————1000————-1200
Batch size——————–100—————150Overheads information:
machine setup costs—————$18,000If the machine setup overheads are absorbed using the number of batches then we do this way:
Number of batches = Total Production units / Batch size
Total number of batches = (1000 / 100) + (1200 / 150) = 18Overhead absorption rate = $18,000 / 18 = $1000
Absorb overhead to each product:
Product A = $1000 x 10 = $10000
Product B = $1000 x 8 = $8000However, if the machine setup overheads are absorbed using batch size then we do this way:
Total batch size = Batch size of product A + Batch size of product B
Total batch size = (10 + 15) = 25Overhead absorption rate = $18,000 / 25 = $720
Absorb overhead to each product:
Product A = $720 x 10 = $7200
Product B = $720 x 15 = $10800John Moffat
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If they are absorbed using the number of batches then what you have typed is correct.
It would make no sense at all for the set-up costs to be absorbed based on the batch size. As explained in my free lectures setting up the machines to produce a batch does not depend on how many units there will be in the batch.
Natasha1996
- Topics: 34
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You mean to say that machine setups are used to produce the number of batches where units are produced of each product.
The machine setup costs should be absorbed based on the (number of setups OR number of batches) because it is the batches that require machine setups for the production, not the number of units in batch size. (if I am correct?)
Could you tell me the appropriate overhead costs for which we can have the batch size as its cost driver? And then we will use batch size to absorb the overhead (just like I did in my previous response).
John Moffat
- Topics: 57
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I do not think that you can have watched my lectures on this, because I do explain what his happening with set-ups.
Thy are using the same machine to produce the different products. So every time they produce a batch of a new product they need to set-up the machines.
Therefore the total number of set-ups needed will be the same as the total number of batches produced, and the set-up cost will therefore be absorbed on this basis.
I cannot think of any overhead costs for which the number of units in a batch would be an appropriate cost driver. The only relevance of the size of the batches is to be able to calculate the number of batches that there are.
(And given that ABC can only be asked in Sections A and B, any questions on it will make it clear as to the cost driver to be used.)
Natasha1996
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