Batch-Level Costs In Activity-Based Costing Refinement, Optimization & Allocation

Abstract

In the past decade, the Activity-Based Costing and the allocation of the batch-level costs have been presented and discussed in almost all cost/managerial accounting textbooks. A widely used example of batch-level cost, in most of the textbooks, is the set-up cost. In almost all of these textbooks, the annual set-up cost is assumed to be known in advance and is allocated based on the number of set-ups. In reality, the set-up cost should be determined first before it can be allocated properly. For the computation of the optimal total set-up cost, first the various factors influencing this category of cost should be discussed and then the methods of the allocation be applied. This paper discusses the various factors affecting the calculation of annual set-up cost. It also demonstrates a model that computes the optimum size of each set-up and the economical number of annual set-ups. Based on the outcomes of the model, the paper demonstrates the calculation of total allocable set-up cost and its allocation to various products.