Batch Costing
Batch cost is the cluster of costs incurred when a group of products or services are produced, and
which cannot be identified to specific products or services within the group.
For cost accounting purposes, it may be considered necessary to assign the batch cost to
individual units within a batch.
The formula for batch costing is as follows: Batch Costing = (Total Cost of Goods Produced /
Number of Units Produced) x Number of Units in Batch.
For example, if the total cost of goods produced is ₹100,000 and the number of units produced is
10,000, then the batch cost would be ₹10 per unit
Batch costing is a type of specific order costing where articles are manufactured in
predetermined lots known as batch.
Here each batch is treated as a separate cost unit and cost are accumulated and ascertained for
each batch.
A batch consists of number of units which are processed simultaneously.
Features of Batch Costing
Batch costing which is also known as ‘lot costing’ has following important features :
Batch costing is a variation of job costing. In job costing work of production is carried out
according to the specifications and instructions given by a customer whereas in batch costing a
large number of units of an identical product are produced as ordered by a customer or for
storage and sale in the market. 2.
Batch is a unit for cost calculation. In a batch the units of identical product may be in hundreds
or in thousands but each batch is regarded as an independent unit and its total cost is equally
divided by the number of units produced in that batch in order to decide the cost of production of
a single unit of the product. 3.
Each batch is given a separate number and the output of a batch is identified by the number of
the batch recorded on each unit of output of the batch. Therefore a unit of the product is output of
which batch can be easily found out by referring to the batch number recorded on the unit, e.g.
the number of the batch in which bottle of medicine has been produced is recorded on the bottle
of medicine.
If the contents of bottles of a batch are found harmful to the patients, all bottles of that batch can
be taken out of market for investigation and if necessary for destruction, on the basis of the batch
number recorded on the bottles.
Unit cost of a product varies with the size of the batch. If quantity produced in a batch is small,
the unit cost of the product is more and if the quantity produced in a batch is large, the unit cost
of the product of that batch is less. Therefore, it is necessary to find out the economic batch
quantity by producing which the cost of production of a unit of the product can be kept to the
minimum.
Advantages of Batch Costing
The accounting work is considerably reduced as a group of homogeneous jobs constitute a batch.
The variations in the costs arising under job costing is smoothened by means of averaging such
costs and spreading over the batch of articles. This gives a consistent cost of production of every
article in the batch.
It takes the benefit of reduced cost of production arising out of EBQ.
Supervision becomes very easy and effective. So idle time is eliminated.
The loss of time due to inter job transfer of materials, labourers and tools is minimised under
batch costing.
Disadvantages of Batch Costing
These are some disadvantages of batch costing:
Determination of a batch from various jobs often poses problem. It is difficult to come across
absolute homogenity of jobs.
When quantity of goods to be manufactured differs from customer to customer, it becomes
difficult to determine the batch.
If the production of a batch is wrongly undertaken due to sub-standard of materials or defective
operation, the whole batch of articles are required to be discarded which causes a great loss to the
manufacturing concern.
Procedure of Batch Costing
The costing procedure for batch costing is similar to that of job costing. The only
difference is that a batch becomes the cost unit rather than a job.
For the purpose of costing, each batch (or group of identical products) is allotted a serial
number (known as a batch number), just like a job number.
The presentation of the various items of cost is made in the form of a statement known as
a batch cost sheet.
The batch cost sheet includes the cost of any direct materials, direct labor, and direct
expenses that can be directly identified with a particular batch.
The share of overheads chargeable to the batch (calculated on some equitable basis) is
also included.
The total cost of a batch, as shown in the batch cost sheet, divided by the total number of
products in the batch yields the cost per product in the batch.
Cost per product in the batch = Total cost of a batch / Total number of products in the
batch
Economy Batch Quantity
Economic batch quantity (EBQ) also called optimal batch quantity or economic production
quantity is a measure used to determine the number of units that can be produced at minimum
average costs in a given batch or production run. The Economic Batch Quantity model, or
Production lot-size model, is similar to the EOQ model in that art optimum is to be calculated for
the batch quantity to be produced. It is the order size of a production batch that minimizes the
total cost. Hence, the batch cost is used to determine the cost per unit or article per unit.
The Economic Batch Quantity (EBQ) is worked out by applying the following formula:
EBQ = √[(2*U*S) / CC]
Where U = Total number of units to be produced in a year,
S = Set-up cost per batch
CC = Carrying cost per unit of production for one year.
If the rate of interest and cost of the production per unit is given, the formula may be amended as
under:
EBQ = √[(2*U*S) / (I * Cm]
Where I = Interest per Taka per year
Cm = Coat per manufacture per unit.
YouTube Links:-
https://www.youtube.com/watch?v=45MwRIcXAh0
https://youtu.be/ZPYD6_FxkYM
