Batch Costing | Meaning | Economic Batch Quantity | Applicability

What is Batch Costing?

Batch costing is another form of job costing. Under this method, homogeneous products are taken as cost unit. A batch consists of a specific number of products or units or articles. The number varies from one batch to another. Hence, batch cost is used to determine the cost per unit or article per unit.

The company may want to get lower cost of production. If so, the cost per unit will also be low. For which, the company has to work out Economic Batch Quantity in the line of Economic Order Quantity. The cost procedure in batch costing is very similar to job costing. Hence, production order number is allotted to each batch.

Definition of Batch Costing

CIMA defines Batch Costing as,

that form of specific order costing which applies where similar articles are manufactured in batches either for sale or for use within the undertaking.

The batch cost is defined as

aggregated costs relative to a cost unit which consists of a group of similar articles which maintains its identity throughout one or more stages of production.

What is Economic Batch Quantity

The Economic Batch Quantity is very similar to Economic order Quantity. But, there is only one difference ie Economic Batch Quantity is calculated to fix the level of production at minimum cost but Economic Order Quantity is calculated to fix the level for ordering the purchase of raw materials, stores and spares.

The following points are considered while fixing the Economic Batch Quantity.

1. Annual demand for the product.

2. Setting up of cost.

3. Manufacturing cost.

4. Rate of consumption.

5. Storage costs.

6. Interest on capital.

7. Times lag between production and consumption of product.

If the machines are set up for production frequently, certainly, the set up cost will be high. If the size of batch is large, automatically, the storage cost will be high. Hence, there is a need of Economic Batch Quantity.

Formula to find Economic Batch Quantity

The following formula is used to calculate Economic Batch Quantity is as follows

Economic Batch Quantity = \sqrt{2DS/1C}

Where,

D = Demand for a period

S = Set up cost

I = Interest Rate

C = Cost per unit of manufacture.

Applicability of Batch Costing

The Batch Costing Method is followed in the industries where production is carried on in large size homogeneous products. Such type of products are produced and stored. Products are produced from the same type of raw materials and in the same process. But the volume of production is determined well in advance ie Economic Batch Quantity.

It is applicable to industries like nuts and bolts, medicine, shoes, books, drugs, computers, read made garments, laptop, radio, biscuits, spare parts of two wheeler, components and in all concerns where production is made in batches.

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