Batch Costing and Contract Costing Problems and Solutions.pptx

ILLUSTRATION-1
Arnav Confectioners (AC) owns a bakery which is used to
make bakery items like pastries, cakes and muffins. AC use
to bake at least 50 units of any item at a time. A customer
has given an order for 600 muffins. To process a batch of 50
muffins, the following cost would be incurred:
 Direct materials- 500
 Direct wages- 50
 Oven set- up cost 150
AC absorbs production overheads at a rate of 20% of direct
wages cost. 10% is added to the total production cost of each
batch to allow for selling, distribution and administration
overheads.
AC requires a profit margin of 25% of sales value.

SOLUTION
Statement of cost per batch and per order
No. of batch = 600 units ÷ 50 units = 12 batches
Particulars Cost per
batch
Total Cost
Direct Material Cost 500.00 6,000
Direct Wages 050.00 600
Oven set-up cost 150.00 1,800
Add: Production Overheads (20% of Direct
wages)
10.00 120
Total Production cost 710.00 8,520
Add: S&D and Administration overheads
(10% of Total production cost)
71.00 852
Total Cost 781.00 9,372
Add: Profit (1/3rd of total cost) 260.33 3,124
Selling price 1,041.33 12,496

ECONOMIC BATCH QUANTITY (EBQ)
As the product is produced in batches or lots, the lot size
chosen will be critical in achieving least cost operation.
Primarily the total production cost under Batch
production comprises two main costs namely
1.Machine Set Up Costs and
2.Inventory holding costs.
If the size is higher, the set up cost may decline due to
lesser set ups required but units in inventory will go up
leading to higher holding costs. If the lot size is lower,
lower inventory holding costs are accomplished but only
with higher set up costs. Economic Batch quantity is the
size of a batch where total cost of set-up and holding costs
are at minimum.

This relationship is explained with the help
of following diagram

CONTINUED….
 As can be seen in the above diagram, Costs are
shown on the Y axis and Batch size or Batch
Quantity is shown on the X Axis. With the higher
batch size, holding cost shows a tendency to
increase whereas Set-up costs show a declining
trend. The point where both the cost lines
intersect each other represents the lowest cost
combination.

CONTINUED….
The economic batch size or Economic Batch Quantity may be
determined by calculating the total cost for a series of possible
batch sizes and checking which batch size that gives the
minimum cost. Alternatively, a formula can be derived which
is similar to determination of Economic Order Quantity (EOQ).
The objective here being to determine the production lot
(Batch size) that optimizes on both set up and inventory
holding cots formula. The mathematical formula usually used
for its determination is as follows:
Where,
D = Annual demand for the product
S = Setting up cost per batch
C = Carrying cost per unit of production

ILLUSTRATION-2
Monthly demand for a product 500 units
Setting-up cost per batch 60
Cost of manufacturing per unit 20
Rate of interest 10% p.a.
Determine economic batch quantity.
SOLUTION:
EBQ =
*20 = 600 UNITS

ILLUSTRATION-3
 M/s. KBC Bearings Ltd. is committed to supply
48,000 bearings per annum to M/s. KMR Fans on
a steady daily basis. It is estimated that it costs ` 1
as inventory holding cost per bearing per month
and that the set up cost per run of bearing
manufacture is ` 3,200
 (i) What would be the optimum run size of
bearing manufacture?
 (ii) What would be the interval between two
consecutive optimum runs?
 (iii) Find out the minimum inventory cost?

SOLUTION-3
(i) Optimum batch size or Economic Batch Quantity
EBQ= = 5,060 units
(ii)Number of Optimum runs =
Annual production/EBQ = 48,000 ÷ 5,060 = 9.49 or 10run
Interval between 2 runs (in days) = 365 days ÷ 10 = 36.5 days
(iii)Minimum Inventory Cost =
Average Inventory × Inventory Carrying Cost per unit per annum
Average Inventory = 5,060 units ÷ 2 = 2,530 units
Carrying Cost per unit per annum= `1 × 12 months = 12
Minimum Inventory Holding Costs = 2,530 units × 12 = `30,360

ILLUSTRATION-4
A Company has an annual demand from a single customer for 50,000 litres of
a paint product. The total demand can be made up of a range of color to be
produced in a continuous production run after which a set-up of the
machinery will be required to accommodate the color change. The total
output of each color will be stored and then delivered to the customer as
single load immediately before production of the next color commences.
The Set up costs are ` 100 per set up. The Service is supplied by an outside
company as required.
The Holding costs are incurred on rented storage space which costs ` 50 per
sq. meter per annum. Each square meter can hold 250 Litres suitably stacked.
 You are required to calculate
 (i) Calculate the total cost per year where batches may range from 4,000
to 10,000 litres in multiples of 1,000 litres and hence choose the production
batch size which will minimize the cost.
 (ii) Use the economic batch size formula to calculate the batch size
which will minimize total cost.

SOLUTION-4
Production Batch
Size
Set-up costs per
annum
Holding Costs per
annum
Total Costs per
annum
4,000 1,250 400 1,650
5,000 1,000 500 1,500
6,000 833 600 1,433
7,000 714 700 1,414
8,000 625 800 1,425
9,000 556 900 1,456
10,000 500 1000 1,500

CONTINUED…
As the total cost is minimum at 7,000 ltr. i.e. `1,414,
thus economic production lot would be 7,000
Litres.
(ii) Economic Batch Quantity (EBQ):
Where,
D = Annual demand for the product = 50,000 Litres
S = Setting up cost per batch = `100 per set-up
C = Carrying cost per unit of production
= ` 50 / 250 litres = 0.20 per litre per annum
= =7071 litres

CONTINUED…
 Working Note:
1.For Production batch size of 7,000 litres
Number of set ups per year = 50,000 ÷ 7,000 = 7.14 or 8 set-
ups Hence, Annual Set up cost per year = 8 × `100 = `800
Average Quantity = 7,000 ÷ 2 = 3,500 litres
Holding Costs = (3,500 ltr. ÷250) × 50 = ` 700
2.It can be seen that EBQ determined with mathematical
formula (7,071 litres)
slightly varies from the one determined by trial and error
method (7,000 Litres)

ILLUSTRATION-5
The annual demand of a product is 36,000 units. It
is produced in batches and the largest size of a
single batch is 6000 units. After each batch is
completed, the set up cost is rs. 1,125. the annual
carrying cost is rs. 2.25 per unit.
Assume average inventory is 50% of the number of
units made in each batch. Selecting 4,6,8,12 and 20
batches per annum, determine annual cost of each
batch and state the optimum number of batches to
minimise the total cost.

SOLUTION-5
PARTICULARS BATCHES
NO OF BATCHES 4 6 8 12 20
Size of batch unit
(36000+no of batches)
9000 6000 4500 3000 1800
Average cost 4500 3000 2250 1500 900
Setting up cost
(No of batches*1125)
4500 6750 9000 13500 22500
Carrying cost
(Average stock*2.25)
10125 6750 5062.5 3375 2025
Total cost 14625 13500 14062.
5
16875 24525

Continued---
 Optimum number is 6 batches of 6000 units each
per annum. At that level, the total cost is the
lowest, as demonstrated in the above table.
 EBQ=
=
=
= 6,000 units.

DIFFERENCE BETWEEN JOB AND
BATCH COSTING
Sr. No
Job Costing Batch Costing
1
Method of costing used for non-
standard and non-repetitive
products produced as per customer
specifica- tions and against specific
orders.
Homogeneous products produced
in
a continuous production flow in
lots.
2
Cost determined for each Job Cost determined in aggregate for
the entire Batch and then arrived
at on per unit basis.
3
Jobs are different from each other
and independent of each other.
Each Job is unique.
Products produced in a batch are
homogeneous and lack of
individuality

PROFORMA OF CC
Contract account is a nominal account and its main purpose is to estimate the
profit earned each year in case of contracts whose tenure or period of completion
exceeds one year.

ESTIMATION OF PROFIT
 1) When % of completion is less than or equal to 25% then full Notional
profit is transferred to reserve.
 2) When % of completion is above 25% but less than 50% following amount
should be credited to p & l a/c
= 1/3 * Notional Profit * {Cash received / Work certified}
 3) When % of completion is more than or equal to 50% then the amount
transferred to profit is
= 2/3 * Notional Profit * {Cash received / Work certified}
[Balance is transferred to reserve a/c]
 4) Completion of contract is up to 90 per cent or more than 90 per cent
i.e. it is nearing completion: In this case the profit to be taken to Profit
and Loss Account is determined by:
= Estimated Profit × Work certified/Contract price × Cash received/Work certified

ILLUSTRATION-1
 Material purchased Rs. 1,00,000; Opening
material Rs. 20,000; Material at site Rs. 30,000;
Material costing Rs. 10,000 was sold for Rs.
12,000; Material costing Rs. 5,000 was sold for
Rs. 3,000; Material costing Rs. 4,000 lost by
fire. Show the treatment of the material.

Solution-1
Particulars Amount
`
Particulars Amount
`
To opening material 20,000 By material at site
30,000
To material purchased 1,00,000 By material sold
12,000
To P & L a/c
(profit on sales of material) 2,000 By material sold
3,000
By P & L a/c
(loss on sales of material) 2,000
By P & L a/c
(material lost by fire)
4,000

ILLUSTRATION-2
A firm of Builders, carrying out large contracts kept in contract ledger,
separate accounts for each contract on 30th June, 2017, the following were
shown as being the expenditure in connection with Contract No. 555.
• Materials purchased 1,16,126
• Materials issued from stores 19,570
• Plant, which has been used on other contracts 25,046
• Additional plant 7,220
• Wages 1,47,268
• Direct expenses 4,052
• Proportionate establishment expenses 17,440
The contract which had commenced on 1st February, 2017 was for `
6,00,000 and the amount certified by the Architect, after deduction of 20%
retention money, was ` 2,41,600 the work being certified on 30th June, 2017.
The materials on site were ` 19,716. A contract plant ledger was also kept in
which depreciation was dealt with monthly the amount debited in respect
of that account is ` 2260. Prepare Contract Account showing profit on the
contract.

SOLUTION- 2
Particulars Amount
`
Particulars Amoun
t
`
To, Materials purchased
A/c To, Material issued A/c
To, Depreciation A/c
To, Wages A/c
To, Direct expenses A/c
To, Proportionate
expenses A/c
To, P & L A/c [15,000 x
2/3 x 4/5]
To, Reserve c/d
1,16,126
19,570
2,260
1,47,268
4,052
17,440
8,000
15,000
By, Work in progress A/c
- Work certified
By, Material stock
A/c
3,02,000
19,716
3,21,716 3,21,71
6
Dr. Contract Account
Cr.

ILLUSTRATION-3
 The following expenditure was incurred on a
contract of ` 12,00,000 for the year ending 31-12-
2015.
Materials 2,40,000
Wages 3,28,000
Plant 40,000
Overheads 17,200
 Cash received on account of the contract to 31st Dec.,
2015 was ` 4,80,000, being 80% of the work certified.
The value of materials in hand was ` 20,000. The
plant had undergone 20% depreciation.
 Prepare Contract Account.

SOLUTION- 3
Particulars Rs Particulars Rs
To Materials
By Materials in hand
To Wages
To Plant
To Overheads
To Notional Profit c/d J
To Profit & Loss A/c
(26,800 × 2/3 × 80%)
To Reserve
2,40,000
20,000
3,28,000
40,000
17,200
26,800
-----------
6,52,000
-----------
14,293
12,507
-----------
26,800
-----------
By Plant in hand
(40,000 less 20%)
By Work-in-progress
Work certified
4 80 000 *100/80
By Notional Profit b/d
32,000
6,00,000
-----------
6,52,000
26,800
-----------
26,800
----------

ILLUSTRATION-4
The following expenses were incurred on an unfinished
contract during the year 2015.
 Materials ` 90,000
 Wages ` 60,000
 Other expenses ` 30,000
2,00,000 was received by the contractor, being 80% of the work
certified. Work done but not certified was ` 5,000. Determine
the profit to be credited to profit and loss account and profit
kept reserve in all the three alternatives given below:
(i) Contract price is ` 3,00,000
(ii) Contract price is ` 5,50,000
(iii) Contract price is ` 12,00,000

SOLUTION-4
To Materials
To Wages
To Other expenses
To Notional profit
90,000
60,000
30,000
75,000
------------
2,55,000
------------
By Working Progress:
Work certified
(2 00 000*100/80)
By Work uncertified
2,50,00
0
5,000
----------
2,55,00
0
----------
Continued----

CONTINUED----
 Profit credited to profit and loss account:
(i) When contract price is ` 3,00,000,
work certfied is 2,50,000/3,00,000 × 100 = 83.33% of the contract
price. As it is more than 50% of the contract price,
profit credited to P&L A/c is Notional profit × 2/3 × 80%
= 75,000 × 2/3 × 80% = ` 40,000
Profit in reserve = ` 75,000 – 40,000 = ` 35,000
 (ii) When contract price is ` 5,50,000,
work certfied is 2,50,000/5,50,000 × 100 = 45.55% of the contract
price. As it is less than 50%,
profit to be credit to P&L A/c is Notional profit × 1/3 × 80%
= 75,000 × 1/3 × 80% = ` 20,000
Profit in reserve = ` 75,000 – 20,000 = ` 55,000

CONTINUED----
(iii) When contract price is ` 12,00,000,
work certfied is 2,50,000/12,00,000 × 100 = 20.83%.
As it is less than 25% of the contract price, no
profit is credited to P&L A/c and the entire amount
of notional profit is to be kept in reserve.

ILLUSTRATION-5
Reena bros undertook a building construction contract. The
contract was commenced on 1/6/2018 and completed on
30/6/2018, contract price is 2,00,000. He incurred the following
expenses.
Materials consumed 16750
Materials in hand 4750
Wages 14250
Direct expenses 72600
Plant purchased 36000
Provide depreciation @ 10% p.a on plant. Indirect expenses
amount to 20% on wages. Prepare contract account and
contractees account in the books of contractor.

SOLUTION-5
To materials purchased
material consumed
16750
material in hand
4750
To wages
To direct expenses
To depreciation
(36000*10%*6/12)
To indirect expenses
14250*20%
To P/L a/c
21,500
14,250
72,600
1,800
2,850
91,750
-----------
2,04,750
------------
By materials in
hand
By contractee a/c
4,750
2,00,000
-----------
2,04,750
-----------

Batch Costing and Contract Costing Problems and Solutions.pptx

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Batch Costing and Contract Costing Problems and Solutions.pptx