What is Batch Costing?
Batch costing is that form of specific order costing under which each batch is treated as a cost unit and costs are accumulated and ascertained separately for each batch. Each batch consists of a number of like units.
Batch costing is a method of costing used by the concerns which produce an identical product or a component in a very large number at a time. All units produced at one time are collectively known as a batch and the cost of production is calculated for a batch because a batch is regarded as a unit. When the batch production becomes complete, production of the next batch is started.
On the basis of batch cost calculated, the cost of single unit of the product is decided and selling price of that single unit of product is fixed by adding expected margin of profit to the cost of production of the single unit of the product. In order to distinguish a unit produced in one batch from the units produced in other batches, each batch is given a separate number and that batch number is recorded on all the units of the product belonging to that batch.
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Features of Batch Costing
Batch costing which is also known as ‘lot costing’ has following important features :
- Batch costing is a variation of job costing. In job costing work of production is carried out according to the specifications and instructions given by a customer whereas in batch costing a large number of units of an identical product are produced as ordered by a customer or for storage and sale in the market. 2.
- Batch is a unit for cost calculation. In a batch the units of identical product may be in hundreds or in thousands but each batch is regarded as an independent unit and its total cost is equally divided by the number of units produced in that batch in order to decide the cost of production of a single unit of the product. 3.
- Each batch is given a separate number and the output of a batch is identified by the number of the batch recorded on each unit of output of the batch. Therefore a unit of the product is output of which batch can be easily found out by referring to the batch number recorded on the unit, e.g. the number of the batch in which bottle of medicine has been produced is recorded on the bottle of medicine.
If the contents of bottles of a batch are found harmful to the patients, all bottles of that batch can be taken out of market for investigation and if necessary for destruction, on the basis of the batch number recorded on the bottles.
- Unit cost of a product varies with the size of the batch. If quantity produced in a batch is small, the unit cost of the product is more and if the quantity produced in a batch is large, the unit cost of the product of that batch is less. Therefore, it is necessary to find out the economic batch quantity by producing which the cost of production of a unit of the product can be kept to the minimum.
Advantages of Batch Costing
Use of batch costing provides following advantages :
- The accounting work is considerably reduced as a group of homogeneous jobs constitute a batch.
- The variations in the costs arising under job costing is smoothened by means of averaging such costs and spreading over the batch of articles. This gives a consistent cost of production of every article in the batch.
- It takes the benefit of reduced cost of production arising out of EBQ.
- Supervision becomes very easy and effective. So idle time is eliminated.
- The loss of time due to inter job transfer of materials, labourers and tools is minimised under batch costing.
Disadvantages of Batch Costing
These are some disadvantages of batch costing:
- Determination of a batch from various jobs often poses problem. It is difficult to come across absolute homogenity of jobs.
- When quantity of goods to be manufactured differs from customer to customer, it becomes difficult to determine the batch.
- If the production of a batch is wrongly undertaken due to sub-standard of materials or defective operation, the whole batch of articles are required to be discarded which causes a great loss to the manufacturing concern.
Industries which use Batch Costing
All those industries which are engaged in the production of identical type of product or component a large quanity at one time use a method of batch costing. Such industries are pharmaceutical industry, industries engaged in production of components used in radio sets, television sets, watches, manufacture of bicycles, two-wheelers, automobiles, industries producing nuts, bolts, screws, etc.
Accounting recording for Batch Costing
A batch consists of a number of units of a product which are of identical nature. When a batch production is to be stared, the machines and equipment to be used for the production are required to be set. The time required for setting – up is recorded and the operator’s wages for such time are calculated. Overheads to be charged according to the overhead absorption rate used are calculated for the set-up time.
The operator’s wages and the overhead charges for set-up time are added to calculate the setting-up cost. (The setting -up cost is of fixed nature and it remains same irrespective of the actual quantity to be produced in a batch.)
For batch production material is issued from the stores and all materials issued for a batch is recorded against the particular number issued to the batch. Direct workers working on a batch prepare time sheets showing the number of batch and the starting time and finishing time for the work performed by them for the batch production. As per the rate of remuneration applicable to the workers the labour cost is calculated by the costing department and the total amount of the labour cost is charged to the particular batch as direct labour cost.
Any expenses specially incurred for the batch are charged to the batch cost as direct or chargeable expenses. Overheads are charged to the batch according to the method seleted for aborption of overheads.
The setting-up cost, the direct material cost, direct labour cost, direct exspenses and the amount of overheads charged are added together to find out the total cost of production of a batch. This cost is divided by the quantity produced in that batch to find out the cost per unit of the product. When a unit of the product is sold to a customer at a certain selling price, the difference between the selling price and total cost of the unit of product indicates the amount of profit earned per unit.
Economic Batch Quantity
In order to control batch cost it is important to decide the quantity to be produced in each batch which enables to keep the batch cost at optimum level. Economic batch quantity is that quantity of a batch which enables the management to keep the batch cost at minimum level. If the quantity of a batch is either increased or decreased from the economic batch quantity determind the batch cost will increase and become more than the batch cost incurred when economic batch quantity is produced.
It has already been mentioned that the batch cost consists of two types of costs as under :
- Setting-up cost: The cost associated with setting up a piece of production equipment. This would include the cost of the setup mechanic, the cost of scheduling, record keeping, moving the starting material, and testing the first few units of output to be certain the equipment is set up properly.
- Carrying Cost: Carrying costs, also known as holding costs and inventory carrying costs, are the costs a business pays for holding inventory in stock. A business can incur a variety of carrying costs, including taxes, insurance, employee costs, depreciation, the cost of keeping items in storage, the cost of replacing perishable items, and opportunity costs. Even the cost of capital that helps to generate income for the business is a carrying cost.
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