The below mentioned article provides a note on batch costing.
CIMA defines Batch Costing as “that form of specific order costing which applies where similar articles are manufactured in batches either for sale or for use within the undertaking.”
The Batch Cost is defined as “aggregated costs relative to a cost unit which consists of a group of similar articles which maintains its identity throughout one or more stages of production.”
The Batch Costing is used when a quantity of similar and identical products are manufactured together as one job. A batch is a group of similar products and it is treated as a single cost unit. A batch of identical articles are manufactured to the requirements of a specific order of the customer.
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The Batch Costing is used in printing, packaging, automobile and engineering components, textiles, building products etc. Job Costing can be characterized by a single product or service, but in Batch Costing, manufacture of similar or identical products will form a batch.
The important feature of Batch Costing is that identical products should be produced and that it should be convenient to group them into a production batch rather than an attempt to separate them and cost them individually. For example, bricks are costed per thousand and it will not be practically viable to analyze the production cost per brick.
The cost of each batch are ascertained in the same way as for an individual job. Each batch is identified by a number, and careful recording of materials issued, scrap, labour time and overheads for the batch will build up the batch cost card. In this way, costs of batches can be compared and variations investigated.
A unit cost can be ascertained by dividing the batch cost by the number of units in a batch as follows:
Batch Costing may also be similar to continuous operation costing, because for the production costs are not attachable to a single individual product as it is being processed but rather the cost of the group of products is averaged over the number of units that are produced in the batch.
Economic Batch Production:
Companies which produce a number of different lines may organize their production on a batch basis rather than a continuous one. When batch production is used, the company has to decide how large a batch to make at a time and how often to make a batch of a particular product.
The problem is similar to the economic order quantity problem. The ordering of a fixed quantity from an outside supplier is replaced by the production of a fixed amount. The cost per order in the previous model is therefore, replaced by the cost of set up.
Total Annual Cost of Production = Annual Cost of Set up + Annual Holding Cost