Page 212 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I

Notes U = No. of units to be produced in a year
S = Set up cost per batch

C = Carrying cost per unit of production
Where rate of interest and cost of production per unit is given, the following formula is
applicable:

2US
EBQ =
IC
×
Where, EBQ = Economic batch quantity
U = No. of units to be produced in a year
S = Set up cost per batch
I = Interest rate per year

C = Cost of manufacture per unit

Example: Compute the economic batch quantity for a company using batch costing with
the following information:
Annual demand for the component 12,000
Set-up cost per batch ` 120
Carrying cost per unit of production ` 0.36
Solution:

2US
Economic Batch Quantity =
C
×
2 ×12,000 120
=
036
EBQ = 2,828 units

Example: The annual demand of a product is 24,000 units. It is produced in batches and
the largest size of a single batch is 6,000 units. After each batch is complete, the set up cost is ` 750.
The annual carrying cost is ` 2.25 per unit.
Assume average inventory as one-half of the number of units made in each batch. Selecting 4, 6,
8, 12 and 24 batches per annum, determine annual costs of each and state the optimum number
of batches to minimize the total costs.
Solution:

No. of batches 4 6 8 12 24
Size of batch units 6,000 4,000 3,000 2,000 1,000
Average stock 3,000 2,000 1,500 1,000 500
Costs :
Set up costs 3,000 4,500 6,000 9,000 18,000
Carrying cost 6,750 4,500 3,375 2,250 1,125
Total Cost 9,750 9,000 9,375 11,250 19,125
Optimum number is 6 batches per annum.

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