Definition: Batch costing is an extension of Job costing in which costs and profit are calculated for batches. The production in batches decreases the setting up costs. However, it increases the carrying and holding costs. The production must be carried out by calculating the Economic Batch Quantity (EBQ).
Preparation of Batch cost sheet facilitates calculation of cost per unit of an individual Batch.
The manufacturing units producing identical products in large quantities divide their total production into small groups. The size of groups may vary according to the need like- Demand and Inventory Creation. Batch costing may apply in industries like:
- Small Tool Making
- Fabric Manufacturing
- Food processing Undertaking, etc
First, let us understand – What is a Batch?
A batch is a collection of similar products arranged in different groups. A certain number of units are contained in a single batch. Each set is assigned a specific batch number for identification.
Content: Batch Costing
- Essentials of Batch Costing
- The procedure of Batch Costing
- Economic Batch Quantity(EBQ)
- Solved Example of Batch Costing
Essentials of Batch Costing
- A batch cost sheet is prepared where the production is accomplished in considerably large numbers.
- Total production is divided into batches. The cost sheet is prepared for these batches separately.
- The profit/loss and per-unit cost of each batch is determined in detail.
- The size of batches may vary in the same manufacturing unit. It is difficult to determine the overhead expenses for the batches during calculation.
- Reduced Costs: The cost of production decreases because of the Economic Batch Quantity.
- Saving in Job Time: The time involved during inter job transfers are minimised.
- Less Accounting Work: The statements are prepared for different batches, which results in reduced and systematic accounting work.
- Ease in Supervision: The idle time of supervisors and workers are utilised due to continuous production.
- Economic Products: The production in batches or bulk splits the cost and results in economical products.
- Customisation: Customisation in the products becomes difficult.
- Error Detection: In batch production, mistake or defect is reflected in the whole lot. It results in an increased number of defective products, which is a loss for the company.
- Difficulty in determining batches: Arrangement of jobs homogenously is challenging in big manufacturing units. One faces difficulty in the creation of batch size.
The procedure of Batch Costing
Some series of steps might be followed at the time of preparing the Batch cost sheet:
- Ascertaining Batch Size: The first step is to determine the size of the batch by production planning and control.
- Batch Number Allotment: These batches are assigned unique batch numbers for identification, management and accounting purposes.
- Determining associated costs: The costs and expenses associated with the production are determined. It may include Direct Expenses, Material and Labour costs. These costs are recorded in the Batch Cost Card.
- Overheads Distribution: Overheads are the indirect expenses incurred on production. These are distributed among the batches considering a specific base.
- Preparation of Cost Sheet: The Batch cost sheet is prepared after production to ascertain the cost of production.
- Per Unit Cost Calculation: The per-unit cost of the product in the batches is calculated by using the following formula:
Economic Batch Quantity (EBQ)
Economic Batch Quantity is the optimum size of the batch which manufacturing units must produce. The size of the batch has a direct impact on the costs associated with it. These costs are categorised into Setting-up cost and Carrying cost.
Economic Batch Quantity follows the approach of Law of Increasing Returns & Economies of Scale. By producing optimum quantity, units can decrease their cost of production, therefore, maximising the profit.
You can use the given formula for calculating Economic Batch Quantity:
A = Annual demand of the product,
O = Setting-up cost per batch,
C = Carrying cost (cost of capital & storage)
Effect of Batch size on Setting-up Cost and Carrying Cost
Setting-up Cost: It is the cost incurred on setting up the machinery for production. The increase in batch size results in the decreased set-up cost and vice-versa.
Carrying Cost: It is the cost of carrying or storing the inventory produced. It also involves variable factors like:-
- Storage and Obsolescence of inventory
- Interest on locked-up capital
The increase in batch size results in the increased carrying cost and vice-versa.
Economic Batch Quantity is obtained when the total cost is minimum, and setting-up cost equals carrying cost.
Importance of EBQ
- Production according to demand
- Reduced setting-up cost
- Less inventory accumulation
- Minimised clerical cost
Solved Example EBQ
Active ltd. has to supply 10,000 Hats per day. They can produce 12,500 Hats in a single time the production is carried out. The cost of holding Hats is 1 paise, and the setting-up cost of a production run is Rs.200 /-. How frequently should the production runs be made?
A = Annual demand of the product = 10000
O = Setting-up cost per batch = Rs.200
C = Carrying cost = Rs.0.01
Production per batch = 20000 units
Solved Example of Batch Costing
Anand ltd. is a sanitiser manufacturing company that produces 50 units of sanitiser at a time. They have received an order for 600 sanitiser bottles. The following costs are incurred to process a batch of 50 sanitisers:
Direct Materials Rs.500/-
Direct Wages Rs.50/-
Set-up cost Rs.150/-
Anand ltd. absorbs production overheads at a rate of 20% of direct wages cost. Add 10% to the total production cost of every batch for selling, distribution and administration overheads.
It requires a profit margin of 25% of sales value. Determine the selling price for 600 sanitisers.
Number of batch = 600 units ÷ 50 units = 12 batches
It is a form of specific order costing, in which the production is accomplished in predetermined lots called Batches. The cost is estimated for a batch that can be of different sizes depending upon the situation and demand. The preparation of the Batch cost sheet enables us to find out the per-unit cost in a Batch.
The manufacturing units must find out the optimum size of the batches to reduce associated costs. Estimation of Economic Batch Quantity can attain this optimum quantity.