Lecture 7 - Batch Costing.pptx. with proper information about the

Except for the difference that in batch costing, a batch instead of a job constitute the cost unit for which costs are compiled, however the basic principles of charging materials, direct labour and overheads for batch costing is similar to that of Job Costing. Separate job costs sheets are maintained for each batch of components produced. Batch costing is basically concerned with producing larger quantity of product such that it could be stocked and sold later.

Batch costing is another form of specific order costing. A batch consists of identical units. The manufacture of wooden pencils may be by batch so that a batch includes pencils of different colours, sizes or lead softness.

Other examples could be of drugs, cigarettes, footwear, clothing, printing, engineering equipment. Each batch is coasted as a job until such time as it is physically broken up. To find cost per unit, the total cost of a batch is divided by the number of items produced in the batch.

Batch Costing – Meaning and Formula
Batch Costing is used where articles are produced in batches and held in stock for assembly of components to produce finished products or for sale to customers. Costs are collected against each batch. When the batch is completed cost per unit is computed by dividing total cost by the number of units in each batch.Batch Costing is used for producing articles like radio, television, watches, pen etc. where a large number of components are assembled to complete the finished products. If the components are produced in batches of large quantity it becomes economical and reduces overall cost of the product. In Batch Costing the important problem is to determine the optimum size of the batch or how much to produce.

Like Economic Order Quantity for materials the Economic Batch Quantity can be derived with the help of table, graph or mathematical formula since production under Batch Costing Method involves two elements of cost namely.

1) Setup or preparation costs which remains fixed per batch irrespective of the size of the batch and

2) Carrying Cost or Storage Cost which vary directly with the size of the batch.

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With the increase in the batch quantity, the unit setup cost come down and vice versa. On the other hand carrying cost increase or decrease with the increase or decrease of the number of units in each batch. Hence economic batch quantity is that point where car­rying costs equal to the setup cost approximately. Total cost also will be minimum at this point.

The following factors are to be considered for determination of Economic Batch Quantity.

1) Setting up Cost per batch.

2) Cost of production per unit.

3) Storage or inventory Cost per unit.

4) Rate of Interest on the Capital employed in the products

5) Annual Demand for the product.

Economic Batch Quantity is calculated by using the following formula.

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Batch Costing – Meaning and Definition
Batch Costing is used where the articles are produced in definite batches.

1. Batch Costing

2. Batch Costing Where the output of the job consists of homogeneous (similar) units, a lot (or) collection of similar units may be used as a cost unit for ascertaining cost. Such lot or collection of units is called as a Batch. It is a form of Job Costing, wherein cost is ascertained for a collection / lot of units called a batch. Separate Cost Sheets are maintained for each batch of products by assigning a batch number. Cost per unit = Total Costs for the Batch/Number of items produced in the Batch Batch Costing may be used in the following circumstances When the output of a job consists of a number of units and it is not economical to ascertain cost of every unit of output independently, e.g. printing of Visiting Cards. When customer's annual requirement is to be supplied in uniform quantities over the year

3. Cost of each batch is ascertained as under Materials: Material Requisitions are priced in the cost department. Material Cost is thus allocated to the relevant batch for which they are issued. Labour : Time Sheets or Job tickets are prepared to determine the amount of time spent on each batch. Direct Wages are charged to batch by multiplying the time spent at the appropriate wage rate. Overhead: Overheads are absorbed on appropriate basis, e.g. Percentage of Direct Labour , Labour Hour Rate, etc.

4. Economic Batch Quantity Economic Batch Quantity (EBQ) represents the optimum size for batch production , at which the total of Set- Up Costs per annum, and Inventory Carrying Costs per annum, are minimum. The determination of EBQ involves two types of costs. Set-up Cost (or Preparation Cost): The processing of a particular batch gives rise to clerical and machine set up costs followed by machine disassembly costs on completion of the batch. These costs are incurred in connection with each batch processed, and are independent of the size of the batch . Carrying Cost (or Holding Cost): The larger the batch size, the greater will be number of units in inventory. Hence the costs associated with holding/carrying the inventory like space-occupancy , interest, etc. will also be higher.

5. If Batch Size increases , there is an increase in the carrying cost but the set up cost per unit of product is reduced , this situation is reversed when the batch size decreases. Thus there is one particular batch size for which the total of set up and carrying costs are minimum . This size is known as Economic or Optimum Batch Quantity. EBQ = A = Annual Demand for Finished Product (in units) S = Set-Up Cost per batch. C = Carrying Cost per unit of Finished Product per annum. If Rate of Interest (I) and Unit Cost of Production (C) is given, then EBQ =  

6. Numericals

7. From the following information, calculate Economic Batch Quantity for a company using batch costing: Annual Demand for the components 2400 units Setting up cost per batch Rs 100 Manufacturing cost per unit Rs . 200 Carrying cost per unit 6 % of manufacturing cost Question 3

8. AB Ltd.is committed to supply 24,000 bearings per annum to CD Ltd. On a steady basis. It is estimated that it costs 10 paise as inventory holding cost per bearing per month and that the set-up cost per run of bearing manufacture is Rs . 324. (a) What would be the optimum run size for bearing manufacture? Question 4