Costing

Manufacturers who utilize a batch costing system need to determine the batch size which will minimize the total cost of production. The economic batch quantity formula can be used to calculate this value.

Batch costing can be used by both manufacturing and service industries. The purpose of the batch cost system is to allow a business to calculate the total cost of a batch of identical units in order that a unit cost, selling price and profitability can be determined.

Manufacturing costs are those which relate to the manufacture of a product and consist of three basic manufacturing cost components which are materials, labor, and expenses.

Labor costs can be split between basic pay which is allocated directly to a job and overtime premium which is normally indirectly allocated across all jobs.

Make or buy, sell or process further, keep or drop, accept or reject a special order, and repair or replace are all examples of decisions which can made using the incremental analysis approach. The technique considers only relevant costs when a business needs to make a choice between alternative options.

Process costing is used when a business operates a continuous production line with a sequence of production processes to manufacture indistinguishable units of product.

Immaterial waste products arising from a production process are known as byproducts or by-products. The products are usually accounted for in a non-GAAP manner using either the production method or the sales method. The production method recognizes the value of the byproduct when it is produced, and the sales method recognizes the value when the byproduct is sold.