BATCH COSTING
Meaning of Batch Costing
➢ Batch means a group of identical or similar units. In
every batch, there are identical or similar units but
each batch is different.
➢ Batch Costing refers to that specific order costing
where product is produced for stock unlike job costing
where it is produced for immediate sale.
➢ Batch costing means the costing technique which is
adopted for ascertaining the cost of the batch. The
information regarding cost is helpful to the
management in deciding the amount of selling price to
be charged from the customers.
➢ Batch costing is to be applied where demand is to be
fulfilled in batches of smaller lot over a period of
time.
➢ Examples of industries adopting batch costing are :-
– Book publishing
– Readymade garments
– Medicines and Drugs manufacturing
– Tires and tubes manufacturing
– Toys manufacturing etc.
➢ Each batch is a separate cost center, which implies that
the cost is to be separately ascertained for each batch
depending upon the quantity contained in each batch.
The amount of total cost is divided by total quantity for
ascertaining cost per unit.
➢ While preparing batch cost statement, it is advised to
disclose set-up cost and the running cost. Set-up cost is
in the nature of fixed cost and it represents the initial
cost of setting-up the machine before starting the
production procedure. Running cost is a type of variable
cost that depends upon the quantity contained in the
batch.
Features of Batch Costing
1) A batch is the cost unit.
2) The batch cost sheet is prepared in the similar
manner as it is done in case of job costing. It
shows essentially the same information in
respect of the batch that job cost sheet shows in
respect of a job.
3) Economic batch quantity is calculated after
considering set-up cost, carrying cost and annual
demand/periodical requirement.
4) Batch Account is opened for each batch. All direct
materials, direct labor and production overheads are
debited to the Batch Account. After completion, batch
cost is transferred to cost of sales.
5) A batch number is allocated to each batch and costs
are accumulated for each batch.
6) The production is carried on in batches and each
batch consists of a specified number of similar
products.
7) The total cost of the batch is divided by the total
number of units in the batch to find out the cost per
unit.
Economic Batch Quantity (EBQ)
• During a particular period, huge quantity of output
may have to be produced but it is not feasible to
produce the total quantity in one batch. This is where
the concept of EBQ comes into existence.
• If huge quantity is produced in one batch, it may lead
to the situation of excessive holding (carrying) cost.
However, if lesser quantity is produced in one batch, it
may lead to the situation of setting-up the machine for
larger number of times which will consequently
increase the set-up cost. It is advised to reach such
situation where the aggregate of holding cost and
setting-up cost is at minimum level.
Cost related to EBQ:
(a) Set-up Cost: Those cost are incurred with each
batch of production and they are, usually,
independent of size of the batch. This means, the set-
up cost of a batch remain unchanged irrespective of
the number of units in the batch. As a result, set-up
cost per unit can be reduced by increasing the size of
batch. The total annual set-up cost increase with
the decrease in size and vice-versa. Because, the
decrease in size needs the increase in number of
batches.
(b) Holding (Carrying) Cost:-
Those which increase with the batch size such as
working capital investment in materials and labor,
cost of handling and storing materials, insurance
and tax charges, interest on capital investment, etc.
Cost per unit (Rs.)
0
EBQ Batch Size (Q)
*Total Cost = Set-up cost + Holding Cost
Formulae Related to EBQ
2𝐷𝑆
1) Economic Batch Quantity (EBQ)=
𝐶
Where,
D = Annual Demand/Periodic requirement of product
S = Setting up cost per batch
C = Carrying cost per unit of output p. a./per period
𝐷
2) Total Set-up Cost = × 𝑆 = N×S
𝑄 (𝑂𝑟 𝐸𝐵𝑄)
𝐷
Where, No. of Batches (N)=
𝑄 (𝑜𝑟 𝐸𝐵𝑄)
𝑄 (𝑜𝑟 𝐸𝐵𝑄)
3) Total Carrying (Holding) Cost = ×C
2
4) Total Cost = Total set-up Cost + Total Carrying Cost
OR
𝐷 𝑄(𝑜𝑟 𝐸𝐵𝑄)
Total Cost = ×S + ×C
𝑄 𝑜𝑟 𝐸𝐵𝑄 2
Total Cost (at EBQ) = 2𝐷𝑆𝐶
