What are Batch-Level Costs?
A batch-level cost is a cost related to a group of units, but which is not associated with specific individual units. For example, the cost incurred to set up a production run is associated with the batch of goods that are subsequently produced. The concept is used to allocate overhead, where batch-level costs are spread among the units in a batch.
For example, the cost to set up a machine to run a batch of 5,000 items is a batch-level cost. This cost must then be allocated to the 5,000 items included in the batch.
Batch level costing is a part of the broader activity-based cost accounting method. Other than this, activity-based cost accounting includes activities at the unit level, customer level, product level, and organization level. While the cost of the unit-level and product-level activities is variable, the cost of organization-level activities is generally fixed. The cost of the batch-level activities usually is fixed irrespective of the number of units in the batch. It is only variable in the sense that it is directly related to the number of batches of goods produced throughout the year. Therefore, the cost driver in the case of batch-level activities is the number of batches.
What Does Batch Level Costs Mean?
Quality control and inspection is also considered a batch cost because it’s associated with a group of products not a specific one. In many cases, a quality control employee will randomly pick out a small percentage of units from a group to test them for quality assurance. Even though the employee isn’t testing every piece in the group, he or she is still testing the group as a whole.
Thus, the costs associated with quality control must be attributed to the entire batch.
What is Batch Level Allocation?
Batch-level allocation estimates the costs or expenses of producing a set of products based on the fact that the products were produced using batch-level activities. Since the sets of commodities were produced as a cluster of units, their costing cannot be done as individual units. Costs must be allocated to the products as a set or batch.
The Batch-level allocation assigns the overhead costs of producing services or commodities to the group of units produced and not an individual unit. This allocation method is aimed at accurately estimating costs to a batch of products in order to assign proper prices and enhance their profitability.
The example below will aid a better understanding of Batch-level allocation. If a company manufactures products in batches or as a set, it is to reduce cost and time needed for the production of individual units. The time and money that will be used to produce one unit might produce 10 units of they are produced as a batch.
Also, expenses associated with procurement of materials, transportation and storage of materials will be minimized when goods are produced as a set.
Therefore, the cost of producing these items cannot be allocated to individual units, rather, to the totality of goods produced as a batch.
Importance of Batch Level Costing
Batch level costing focuses on tracing the consumption of resources while producing a batch of goods and transferring this cost to the final output. It helps the company to make critical production-related decisions at the managerial level.
Correct Pricing of Products
It helps to correctly identify small costs that should be part of the final pricing of a product. Otherwise, there is a risk of ignorance of these costs. In other words, it helps to get the pricing right of the product. Also, it may help to correct the pricing of over-priced products in its portfolio. It will help to give a competitive edge to the company in the market and hence, increase its sales and profitability.
Batch level costing can also help identify cost-driving processes that have become obsolete or redundant and need proper examination and change. Processes change with time and new technology. Accurate costing helps to evaluate costs that can be curtailed or eliminated by changing the methods in use. It can enable us to move to more efficient and effective overhead cost drivers. It will again help the company to minimize costs and increase its profitability.
Helps to Take Producing or Outsourcing Decision
There are specific processes where the batch level costs may turn out to be unusually high. Some processes may require expensive set-up or repairs or may involve a very costly quality control and inspection process. Such costs can lead to difficulty in allocation to the product price. In such cases, the company can decide to outsource those processes or buy finished products or intermediate products from other manufacturers rather than making it on its own. It may result in it being better-off.