In this article we will discuss about:- 1. Introduction to Batch Costing 2. Difference between Batch Costing and Job Costing 3. Procedure of Batch Costing 4. Economic Batch Quantity 5. Advantages of Batch Costing 6. Disadvantages of Batch Costing.
Contents:
- Introduction to Batch Costing
- Difference between Batch Costing and Job Costing
- Procedure of Batch Costing
- Economic Batch Quantity
- Advantages of Batch Costing
- Disadvantages of Batch Costing
1. Introduction to Batch Costing:
Under Batch Costing Method, the cost is ascertained in respect of a batch of goods or components manufactured. There are certain products whose cost of production cannot be ascertained in isolation. Examples of such products are – hardware (such as bolts, nuts, screws, pins, etc.), bakery products such as breads, biscuits, cakes, etc.
ADVERTISEMENTS:
So industries which manufacture products of this nature make use of batch costing. Other examples of industries which adopt batch costing are – readymade garments, drugs and pharmaceuticals, spare parts and component parts as in the case of automobiles, radios, TV’s, refrigerators, machineries, etc.
In order to know the cost of production of a batch of articles, a batch cost sheet is prepared. The production planning determines the batch of articles to be produced depending upon the orders received or the potential demand for such articles.
The other factors considered in determining a batch of articles to be manufactured are the capacity of machines, flow of work, treatment of work-in-progress and such other operation factors. The cost per article is obtained by dividing the total cost of batch by the member of articles manufactured in the batch. The units manufactured in a batch are identical in nature.
2. Difference between Batch Costing and Job Costing
:
ADVERTISEMENTS:
Batch costing does not differ much from job costing in respect of accounting procedure. However, there are some differences between batch costing and job costing.
They are:
(i) Under job costing, each job is treated as a cost unit. But under batch costing, a batch of products is treated as a cost unit.
(ii) Under job costing, production is undertaken only against specific orders. On the other hand, under batch costing, production is taken up to be held in stock and sold on demand and also on receiving specific orders from customers.
ADVERTISEMENTS:
3. Procedure of Batch Costing
:
ADVERTISEMENTS:
First, the size of the batch is determined. The size of the batch is determined by the production planning and control department. Each batch is given a batch number in the same way as a job is given a job number. Direct material cost, direct labour cost, and direct expenses, which can be identified with the batch, are directly charged to the concerned batch. Overheads are apportioned among the batches on one of the suitable bases as in the case of job costing.
When the production of the batch of articles is completed, to ascertain the cost of production of the batch of products, a batch cost sheet is prepared. The cost indicated by that batch cost sheet is the total cost of production of the batch of products. The cost per unit of the batch of products is ascertained by dividing the total cost of the batch by the number of units produced in the batch.
4. Economic Batch Quantity
:
ADVERTISEMENTS:
The concept of economic batch quantity is quite similar to economic order quantity. In batch costing, the determination of economic batch quantity assumes more importance. In fact, determining the size of the batch is a problem by itself under batch costing. This is so because, if the batches are many, the economies arising out of large scale production is not taken advantage of.
On the other hand, if batches are very large it involves more of inventory and it has its own advantages. Therefore, it is always necessary to determine the optimum size of the batch before the production is started. The economic batch quantity also helps in eliminating the setting up time involved whenever batches of articles are produced.
Thus it can be said that the concept of economic batch quantity is an example of the law of increasing returns and takes advantages of economies of large scale production. By producing the goods in an optimum batch, it reduces the cost of production, thereby maximising the profit.
Factors Determining Economic Batch Quantity:
ADVERTISEMENTS:
The Economic Batch Quantity (EBQ) is determined after taking into consideration the certain factors.
They are:
(1) The machine capacity available in the factory.
(2) The flow of work in the factory.
ADVERTISEMENTS:
(3) Annual demand for the product.
(4) Cost of carrying inventory or storage of inventory.
(5) Interest on capital invested.
(6) Production cost which includes getting up cost and loss of time due to changes of work; wastage of materials, increased supervision costs, etc.
ADVERTISEMENTS:
Importance of Economic Batch Quantity:
In batch costing, determination of the E.B.Q. assumes more importance, due to the following reasons:
(1) The economic batch quantity ensures the production of goods in the required quantity to meet the demand.
(2) The economic batch quantity will help to reduce the quantity of inventory.
(3) The economic batch quantity will reduce the machine getting-up time.
(4) The optimum batch size will reduce the machine set-up costs.
ADVERTISEMENTS:
(5) The economic batch quantity will also reduce the clerical costs.
(6) The production of goods in batches is undertaken in economic batch quantity, there will be the economies of large-scale production. If goods are produced in a batch, there will be reduction in cost of production per unit and more profits for the concern.
Formula to Determine Economic Batch Quantity:
Generally the following formula is used for the determination of economic batch quantity:
Where,
EBQ = Economic Batch Quantity
2 = It is a constant figure
U = Units to be produced in a year
S = Setting-up Cost per Batch
C = Carrying Cost per unit of Production per year
Where the rate of interest on capital invested is given, the following formula may be used for the determination of economic batch quantity –
Where,
EBQ = Economic Batch Quantity
2 = It is a constant figure
U = Units to be produced in a year
S = Setting-up Cost per Batch
I = Interest Rate per annum
C = Cost of Manufacture per unit
5. Advantages of Batch Costing
:
Following are the main advantages of batch costing as compared to job costing:
(1) Accounting work is reduced under batch costing because costing is done in respect of a batch of product of homogeneous jobs.
(2) It makes benefit of reduced cost of production arising out of economic batch quantity or lot size.
(3) Under this method, supervision becomes easy and more effective by means of spreading over the supervisor’s time over all the units constituting the batch. Thus, the idle time of supervisor’s as well as workers are eliminated.
(4) The loss of time under job costing arising out of inter-job transfer of materials, labours and tools are minimised under batch costing.
(5) There are the advantages of consistent cost of production of every article produced in a batch under batch costing.
6. Disadvantages of Batch Costing
:
The main disadvantages of batch costing are:
(1) Determination of a batch from various jobs often pose problem. It is difficult to come across absolute homogeneity of jobs.
(2) When quantity of goods to be manufactured differs from customer to customer, again it becomes difficult to determine the batch.
(3) If the production of a batch is wrongly undertaken, the whole batch of the articles are to be discarded which will become a great loss to the manufacturer.