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A company manufactures memory chips for phones. A customer has ordered 300 chips.
A standard batch of 100 chips has the following costs:
Direct materials
$25
Direct labour
$10
Machine set up
$100
The production overheads are $100 per labour hour. Labour is paid $20 per hour.
What is the cost of this customer order?
—– Do we need to add batch setup cost for three batches or only one time as all the three batches are making same product. Please clarify.
Is there no other information given in the question?
I ask because it really depends on whether they will make 300 all at once (in which case there will be just one set-up cost) or whether they make the 300 in three separate batched (in which case there will be three set-up costs).
This question is actually from study hub. There is no other information given in the question and in solution they have taken setup cost three times. That’s what confusing me because you told me earlier that for similar batches we take it only once and also in an illustration of Kaplan they have also taken batch setup cost for similar batches once.
What should I do now, I am so confused.Don’t worry – although the answer has assumed that they do make three separate batches, actual exam questions will make it clear. Provided that you are happy with the logic for each of the two situations then it will not be a problem in the exam.
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