Meaning of Batch Costing
Batch costing is defined as specific order costing where cost for each batch of production is calculated. It reflects cluster of costs incurred by company when products are produced in group and it is not possible to identify cost of individual product within group. Each batch of products manufactured serve as cost unit, and cost are accumulated and determined individually for every batch. There are specific number of homogeneous products or articles found within each batch and this number varies from one batch to another. Batch costing method is also called lot costing because products are manufactured in lots, such as in 500, 700 or any number. It is more applicable to industries producing identical products in large quantities, for example -pharmaceutical industry, watch and cloth factories, food industries, etc.
Concept of Batch Costing
The batch cost serves as a basis for calculating cost of single product under this costing method. Once cost of whole batch is determined, value for single product is computed via dividing total batch cost by number of units within one batch. Companies, in order, to avoid any confusion among products manufactured in one batch from ones manufactured in another batch allots separate batch number. Such number is printed on every single unit of product belonging to specific batch produced.
Features of Batch Costing
Various features of batch costing are as follows: –
- Variation of job costing- Batch costing is simply a variation of job costing. Job costing refers to costing of production work carried out as per the instructions and specifications of client. On the other hand, batch costing involves computing cost of identical products that are manufactured in large quantities within batch for storing and selling in market.
- Unit for cost calculation- Every batch serve as independent unit under batch costing method. Here, similar type of products are produced in large numbers such as hundreds or thousands that makes it quite difficult to directly calculate cost of individual product. The production cost of single unit is therefore computed by dividing the total cost of one batch with number of units included within that particular batch.
- Per unit cost varies with batch size- The per unit cost of product is directly proportional with size of batch under batch costing. If large quantity of products is produced within one batch, then per unit cost of product will be lesser. However, if quantity of products produced within one batch is small then cost of individual product will be higher. It makes necessary for companies to determine their economic batch quantity under which optimum quantity of products are produced bring the cost to minimum.
- Batch number is allotted to each product for easy identification of their respective batch- A large quantity of similar products are produced within single batch that might create confusion among products from one batch and another batch. To overcome this, a batch number is provided to each product that contains all relevant information. For example, in case of medicines, batch number is printed on their package. Now suppose if any medicine is found harmful for patients due to its contents, then using the batch number, whole batch and products produced within that batch can be easily identified. The company can take out complete batch from market and if necessary, can destroy them.
Procedure of Batch Costing
The procedure of batch costing method begins with determination of batch size. Batch size means the number of products or articles to be included within one batch. This size is decided by production planning and control division of business enterprise. A distinct batch number is given to every batch for easy identification of all concerned details.
Direct cost of materials, labour and other expenses that are easily identifiable with batch, are charged directly to concerned batch. The other overhead expenses are apportioned among the batches.
Once production of batches is completed, batch cost sheet is prepared in order to determine the production cost of the batch of products. The final cost computed in batch cost sheet indicates the total cost of production of batch. Now, cost per unit can be simply find out by dividing the total cost of batch production with number of units produced within batch.
Advantages of Batch Costing
The advantages of batch costing are well-explained in points given below:
- Simplify accounting work- The first and foremost benefit provided by batch costing is that it eases and simplify the accounting work of business organizations. A separate cost sheet is prepared for each batch of homogenous products manufactured under this method. This helps in carrying out the accounting work in systematic manner and avoids any confusion during cost calculation of products.
- Reduce cost- Batch costing helps in taking benefits of reduce costs by determining economic lot size for companies. Every company doing production in lot need to decide certain size of that lot, i.e., how many articles will be included in one lot of production. The production planning and control team ascertain Economic batch quantity (EBQ) that is simple defined as optimum size of batch need to produced by manufacturing units. EBQ is point where cost of producing product is at minimal point for business organization.
- Ease in Supervision- Batch costing makes supervision work easier and more effective task. The duties of supervisor’s are spread over all of the units constituting batch of production. This thing avoids any idle time of supervisors as well as workers of business enterprise.
- Avoid variations in costing- It enables in maintaining the consistency in cost of production of each article manufactured within batch under batch costing. Batch costing avoids cost variations via averaging variable expenses and spreading over the batch of articles. This eventually leads to maintenance of consistent production cost for each article in batch.
- Saves job time- The batch costing method as compared to job costing assist in saving time while performing job duties. Time involved in inter-job transfer of raw materials, tool and labours get minimized under this method of costing.
Disadvantages of Batch Costing
Various disadvantages of batch costing are as follows: –
- Difficult to customize- It is difficult to do customization in products that are manufactured in large quantities within batches by companies. The type and quantity of products required differ from one customer to another. Under such cases, it becomes difficult to carry out production in accordance with individual needs.
- Problem in ascertaining batches- It become problematic to ascertain batch from various jobs. In big manufacturing enterprises, arranging jobs in homogenous manner is challenging task. Due to this, one is unable to create proper size of batch.
- Detection of error- Under batch costing, mistakes or error get reflected in whole lot containing large number of products. When complete batch of production gets defect then whole batch needs to be discarded. This will eventually bring a great amount of loss to manufacturer.