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  Batch Costing

Introduction to Batch Costing

In the job costing, we have observed that the production is according to the orders of the customers and as per to the specifications mentioned through them. Alternatively, batch costing is employed in which units of a product are manufactured in batches and employed in the assembly of the finishing product. So, components of products such as air conditioners, television, radio sets, and other consumer goods are manufactured in batches to preserve consistency in all respects. It is not feasible here to manufacture according to the needs of customers and therefore rather than manufacturing a single unit, various units of the component are manufactured. For instance, rather than manufacturing a single unit, it will be all the time advantageous to manufacture say, 75, 000 units of the component because it will decrease the cost of production considerably and also bring standardization in the quality and another aspects of the product. The finished units that are held in stock and normal inventory control methods are employed for controlling the inventory. Batch number is provided to each batch manufactured and according to that the cost is worked out.

In batch costing, the costing procedure is more or less identical to the job costing in the sense that cost is carried out for each batch than job. Direct costs such as direct materials, direct labour and direct expenses are charged directly to the job because they are traceable to the job. The source documents employed for them are material requisitions, labor records and records pertaining to the direct expenses. Indirect costs that are overheads are owed or apportioned to the batch on a number of appropriate bases. So a batch cost sheet is ready to depict the total cost of the batch.

One of the significant issues of batch type production is to determine the batch size. In fact the determination of appropriate batch size of the production contains conflicting views. If production is produced in large quantities, the influence of the setting up cost will be lower because the setting up cost is fixed per batch. But conversely if the production quantity is large, the inventory carrying cost would be high because more inventories will comprise to be carried over in the store. The carrying cost of the inventory involves cost of risk of pilferage, spoilage, storage, obsolescence and interest on the investments blocked in the inventories. Hence the size of the batch should not be either very small or very large. On the basis of a trade off among large size and small size, a suitable size of the batch should be decided. This batch size is termed as Economic Batch Quantity that is identical to the idea of Economic Order Quantity. This quantity is firmed with the help of the following formula.

Economic Batch Quantity = √2AS/C

Where   A = Annual requirements of the product

S = Setting up cost per batch

C = Carrying cost per unit of inventory per annum.

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