MEANING

Batch costing is used for calculating total cost

of each batch.
Batch is small group of units
produced for production purposes

which

is

Allraw material is supplied on batch basis and

other expenses are also paid on the basis of
each batch.

For example, in the drugs industry, producer will make the batch of
tablets instead of producing single tablet. This will be easy to sell
that batch in market. So, in order to calculate cost of each batch, we
will calculate:

Material Cost Per

Batch

Labor Cost Per

Batch

Cost Of
Each
Batch

Other
ExpensesPer
Batch.

If we want to calculate cost per unit, we have to divide total batch

cost with total batch units .

Features
Each batch is treated as a cost unit
All costs are accumulated & ascertained for each batch
A separate batch cost sheet is used for each batch & is
assigned a certain number by which the batch is
identified.
The cost per unit is ascertain by dividing the total cost of
a batch by the number of items produced in that batch

Industries Where Batch Costing Is Applied

Readymade garment manufacturing industries

Pharmaceutical/Drug Industries
Spare part & components manufacturing industries
Toy manufacturing industries
Tire & tube manufacturing industries

Setting up & processing

cost
The setting up &processing costs
refer to the cost incurred for setting
up &processing operations before the
start of production of a batch.
There is a inverse relationship
between batch size and set up &
processing costs.

Large the
batch size

Smaller the
batch size

Lower the set

up costs
because of
lower
batches.
Higher the
set up costs
because of
more
batches.

Carrying costs
The carrying costs refer to the cost
incurred in maintaining a given level
of inventory.
There is positive relationship
between batch size and carrying
costs.

Larger the
batch size

Higher the
carrying
costs
because of
higher
average
inventory

Smaller the
batch size

Lower the
carrying
costs
because of
lower
average

Trade off between set up costs & carrying costs

The optimum quantity of batch which

should be produced at a point of time
is determined after achieving a trade
off between set up costs and carrying
costs .
Such batch size is known as EBQ
because annual total costs of set up
and carrying is minimum at this
batch size.

Economic batch quantity

Economic batch quantity refers to the optimum

quantity batch which should be produced at a point of

time so that the set up and processing cost and carrying
cost are together optimized.

EBQ=
D or A : Annual demand
S : Set up cost per batch
C : Carrying costs per unit per year.

Now with following simple example, we can explain

Economic batch size or quantity which we should
have to produce.
Compute the economic batch quantity for a company
using batch costing with the following information.
Annual Demand for the component 24000
Set-up cost per batch Rs. 120
Carrying Cost per Unit of Production Rs. 0.36

EBQ=
Economic Batch Quantity = ( 2 X 24000 X 120) /
0.36 ) = 4000 units

Advantage
the advantage of batch production is that the company
that uses it has a variety of products rather than just one
type so therefore it gives customer a larger choice and
hence a larger possibility of sales.
Another advantage is that the company is reducing its
risk on simply concentrating on one product; it produces
a variety of different ones of the same type.
The advantage of flow production is that the company
using it can mass produce many items at once which
would would reduce the unit cost, hence reducing the
price and possibly increasing sales. It may therefore
develop a good brand name for low prices.

Disadvantage
The main disadvantage of batch production is that there's a
period of time for which the machinery is being changed
and this causes the productivity to stop completely which
the could cause the workers to sit idle; basically the work

stops.
The main disadvantage is that the work is quite repetitive
for workers and can cause demotivation (imagine sitting at
a conveyor belt all day tightening the same screw!) which
leads to a poor quality/productivity. Also opposite to batch
production, the company is only producing one type of
product therefore it's concentrating all of its risk on one
good.

Batch Costing vs