Batch Costing - Meaning, Need and Types (With Calculations)

9/25/2015
BatchCosting:Meaning,NeedandTypes(WithCalculations)
Batch Costing:
Meaning, Need
and Types (With
Calculations)
byAshishLodhaBatchCosting
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Read this article to learn about the

meaning, need and types of batch costing
with its comparison to job costing.
Meaning:
Batch costing is a form of specific order
costing. Job costing refers to costing of jobs
that are executed against specific orders
whereas in batch costing items are
manufactured for stock. A finished product
may require different components for
assembly and may be manufactured in
economical batch lots.
When orders are received from different
customers, there are common products
among orders; then production orders may
be issued for batches, consisting of a
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predetermined quantity of each type of

product. Batch costing method is adopted in
such cases to calculate the cost of each such
batch.
Cost per unit is ascertained by dividing the
total cost of a batch by number of items
produced in that batch. In order to do that a
Batch Cost Sheet is prepared. The
preparation of Batch Cost Sheet is similar to
that of Job Cost Sheet. This method is mainly
applied in biscuits manufacture, garments
manufacture, spare parts and component
manufacture, pharmaceutical enterprises
etc.
Illustration 1:
Batch No. A-110 incurred the following
costs:
Direct Materials Rs 10, 000
Department: A 800 labour hours @ Rs 5 per
hour
B 1400 labour hours @ Rs 6 per hour
Factory overheads are absorbed on labour
hours basis and the rates are Rs 7 per hour
for Department A and Rs 4 per hour for
Department B. The firm uses a cost plus
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system for selling prices and expects a 25%

gross profit (sales value minus factory cost).
Administrative overheads are absorbed at
10% of selling price. Assuming that A-110
units were produced in Batch A-110,
calculate the selling price per unit.
Production is usually done in batches and

each batch can have any number of units of
Component in it. The optimum quantity for
a batch is that quantity for which the setting
up and carrying costs are minimum, such an
optimum quantity is known as Economic
Batch Quantity or Economic lot size.
Determination of the economic lot size is
important in industries where batch costing
is employed.
NeedforDeterminingEconomicLot
Size:
The need for determining economic lot
size arises as:
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(i) Every time a component/product is to be

made, setting up of the tool is involved.
Because of this some loss in production time
will be there. Therefore, maximum number
of units are produced once the machine is
set in order to reduce the cost per unit,
(ii) Such large production at one run will
lead to accumulation of inventory and the
costs related thereto,
(iii) Thus there is a quantity for which
reduced cost of production is just offset by
costs of carrying the quantity inventory. The
determination of most economical batch
quantity requires consideration of many
related factors of costs and economies.
The factors that influence the decision in
this respect are:
(a) Set up cost,
(b) Manufacturing cost,
(c) Interest on capital,
(iv) Storage cost, and
(v) Rate of consumption.
TypesofCostsinBatchCosting:
There are two types of costs involved in
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Batch Costing:
(i) Set up costs
(ii) Carrying costs.
If the batch size is increased, set up cost per
unit will come down and the carrying cost
will increase. If the batch size is reduced, set
up cost per unit will increase and the
carrying cost will come down. Economic
Batch quantity will balance both these
opponent costs.
Illustration 2:
Compute the economic batch quantity for
a company using batch costing with the
following information:
Illustration 3:
The annual demand of a product is 24,000
units. It is produced in batches and the
largest size of a single batch is 6,000 units.
After each batch is complete, the set up cost
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is Rs. 750. The annual carrying cost is Rs.

2.25 per unit.
Assume average inventory as one-half of the
number of units made in each batch .
Selecting 4, 6, 8, 12 and 24 batches per
annum, determine annual costs of each and
state the optimum number of batches to
minimize the total costs.
Illustration 4:
The demand of an item is uniform at a rate
of 25 units p.m. The set up cost is Rs. 30 each
time a production is made. The production
cost is Rs. 3 per item and the inventory
carrying cost is 50 paise per unit p.m. If the
shortage cist is Rs. 3 per item p.m.
determine how often to make a production
run and of what size? Also calculate reorder level.
DifferenceBetweenJobCostingand
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BatchCosting:
In case of job costing, work is undertaken as
an identifiable unit and cost of each job is
ascertained separately. Such a method of
costing is suitable in case of motor
workshop, printing press and where
manufacture of products is according to
customers specific requirements.
Batch costing is extension of job costing. Job
costing refers to costing of jobs that are
executed against specific orders whereas in
batch costing items are manufactured for
stock. In batch costing a batch may
represent a number of small orders passed
through the factory in batches. Each batch is
treated as a unit of cost and is separately
costed. Cost per unit is ascertained by
dividing the total cost of the batch by
number of items produced in that batch.
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9/25/2015

Read this article to learn about the

predetermined quantity of each type of

system for selling prices and expects a 25%

Production is usually done in batches and

(i) Every time a component/product is to be

is Rs. 750. The annual carrying cost is Rs.

Inventory Valuation: Meaning,

Essay on Legislature (528 Words)

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