Batch Costing | CMA Inter Syllabus

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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.

Essential features of Batch Costing

1. Each batch is treated as a cost unit.
2. All costs are accumulated and ascertained for each batch.
3. A separate Batch Cost Sheet is used for each batch and is assigned a certain number by which the batch is identified.
4. The cost per unit is ascertained by dividing the total cost of a batch by the number of items produced in that batch.

Applications of Batch Costing

Batch Costing is applied in those industries where the similar articles are produced in definite batches for internal consumption in the production of finished products or for sale to customers generally. It is generally applied in –

1. Readymade Garments Manufacturing Industries.
2. Pharmaceutical / Drug Industries.
3. Spare parts and Components Manufacturing Industries.
4. Toys Manufacturing Industries.
5. Tyres and Tubes Manufacturing Industries.

5.2.1 Economic Batch Quantity (EBQ)

Economic Batch Quantity refers to the optimum quantity batch which should be produced at a point of time so that the set up and processing costs and carrying costs are together optimized.

Setting up and Processing Costs

The setting up and processing costs refer to the costs incurred for setting up and processing operations before the start of production of a batch. There is an inverse relationship between batch size and set up and processing costs.

Large the Batch size : Lower the set-up costs because of few batches.

Smaller the Batch size : Higher the set-up costs because of more batches. 

Carrying Costs

The carrying costs refer to the costs incurred in maintaining a given level of inventory. There is positive relationship between batch size and carrying costs.

Large the Batch size : Higher the carrying costs because of high average inventory.

Smaller the Batch size : Lower the carrying costs because of low average inventory.

The    trade    off

The optimum quantity of batch which should be produced at a point of time determined after achieving a tradeoff between set up costs and carrying costs. Such batch size is known as EBQ because annual total cost of set up and carrying is minimum at this batch size.

Economic Batch Quantity =

where, A = Annual Demand
 S = Set up Cost per batch
 C = Carrying Cost per unit per year

Illustration 7

1. From the following information, calculate Economic Batch Quantity for a company using batch costing:

Solution:

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 Illustration 8

A customer has been ordering 90,000 special design metal columns at the columns at the rate of 18,000 per order during the past years. The production cost comprises ₹120 for material, ₹ 60 for labour and ₹ 20 for fixed overheads. It costs ₹ 1,500 to set up for one run of 18,000 column and inventory carrying cost is 15% since this customer may buy at least 5000 columns this year, the company would like to avoid making five different production runs. Find the most economic production run.

Solution:

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Illustration 9

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 ₹ 324.

(a) What would be the optimum run size for bearing manufacture?

(b) What is the minimum inventory holding cost at optimum run size?

(c) Assuming that the company has a police of manufacturing 6000 bearing per run, how much extra costs would the company be incurring as compared to the optimum run suggested in (a)?

Solution:

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Illustration 10

Component ‘Gold’ is made entirely in cost centre 100. Material cost is 6 paise per component and each component takes 10 minutes to produce. The machine operator is paid 72 paise per hour, and machine hour rate is ₹ 1.50. The setting up of the machine to produce the component ‘Gold’ takes 2  hours 20 minutes.

On the basis of this information, prepare a cost sheet showing the production and setting up cost, both in total and per component, assuming that a batch of :

(a) 10 components,

(b) 100 components, and

(c) 1000 components is produced.

Solution:

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Exercise

Multiple Choice Questions

1. Batch costing is a type of

1. Process costing
2. Job Costing
3. Differential costing
4. Direct costing

Answer : b

Batch costing is a variation of job costing where costs are accumulated and allocated to a group or batch of similar products or units. It is used when a batch of products or units are produced together, and the costs associated with that batch need to be determined. Each batch is treated as a separate job or cost unit, similar to how individual jobs are treated in traditional job costing.

2. Batch costing is similar to that under job costing except with the difference that a:

1. Job becomes a cost unit.
2. Batch becomes the cost unit instead of a job
3. Process becomes a cost unit
4. None of the above

Answer : b

In batch costing, costs are accumulated and allocated to a group or batch of similar products or units, where the batch itself is treated as the cost unit. This is different from traditional job costing where each individual job is treated as a separate cost unit.

3. Economic batch quantity is that size of the batch of production where:

1. Average cost is minimum
2. Set-up cost of machine is minimum
3. Carrying cost is minimum

4. Both (b) and (c)

Answer : d

Economic batch quantity is that size of the batch of production where the combined costs of setup (or changeover) costs and holding (or carrying) costs are minimized, resulting in an optimal balance between production setup costs and inventory holding costs. This quantity aims to minimize the total cost associated with producing and storing a batch of items.

4. Which of the following documents are used in job costing to record the issue of direct materials to a job:

1. Purchase order
2. Purchase requisition
3. Goods received note
4. Material requisition

Answer : d

5. Which of the following statements is true :

1. Batch costing is a variant of jobs costing
2. Job cost sheet may be used for estimating profit of jobs
3. Job costing cannot be used in conjunction with marginal costing
4. In cost plus contracts, the contractor runs a risk of incurring a loss

Answer : b

6. Which of the following statement is true:

1. Job costing can be suitably used for concerns producing any specific product uniformly
2. Job costing cannot be used in companies applying standard costing
3. Job cost sheet may be prepared to facilitate routing and scheduling of the job
4. Neither A. nor B. nor C.

Answer : d