A batch is a group of similar items which maintains its identity throughout one or more stages of production and is treated as a cost unit.
Batch costing is a form of order costing or job costing where costs are attributed to each batch as a cost unit. It deals with a group of items that are closely related and are being made for a single customer all at the same time.
The objective of batch costing is to determine the total cost of the batch and the cost of each unit in the batch.
KPL uses a batch costing system for its drilling. It uses a “cost-plus” system of price setting and sets a mark-up of 25% on sales values. Administration costs are absorbed at 10% of the selling price whereas factory overheads are absorbed at a rate of ksh. 1,200 per direct labour hour for department A and ksh. 900 per direct labour hour for department B.
Batch Q005 consists of 1,000 shafts to be drilled and bored and the following costs have been incurred on it:
Dept A – 500 direct Labour hours @ Ksh. 1,000 per hour
Dept B – 750 direct Labour hours @ Ksh. 800 per hour
Direct materials costing Ksh. 647,500 have also been incurred on batch Q-005