Batch costing is a type of specific order costing where articles are manufactured or processed simultaneously in predetermined lots, known as batches. Therefore, batch costing is also referred to as ‘lot costing.’ Each batch is treated as a separate cost unit, and costs are accumulated and ascertained for each batch.
For example, if the total cost of goods produced is Rs. 10,00,000 and the number of units produced is 100,000, then the batch cost would be Rs. 10 per unit.
From this example, we understand that batch costing calculates the cost of producing a group of identical products (a batch) rather than individual units. It is suitable for industries that manufacture in lots, helping in cost control, pricing decisions, and identifying areas for improvement in production.
Features of Batch Costing:
- Cost Allocation: Batch costing uses a cost per unit of production and allocates overhead costs based on the number of units.
- Application in Homogeneous Production: It is applicable when identical or homogeneous products are produced in batches.
- Cost Accumulation: Costs, including direct materials, direct labor, and overheads, are accumulated for each batch.
- Impact of Batch Size on Unit Cost: The unit cost of a product varies with the size of the batch. If the quantity produced in a batch is small, the unit cost per product is higher. Conversely, if the batch size is large, the unit cost is lower. Hence, determining the Economic Batch Quantity (EBQ) helps minimize production costs.
- Relation to Job Costing: Batch costing is a modified form of job costing, where a “job” is defined as a batch of production. This reduces accounting work as a group of homogeneous jobs constitute a batch.
- Costing Procedure: The costing procedure is similar to job costing, except that a batch, rather than a job, becomes the cost unit. Each batch is assigned a unique serial number (batch number), akin to a job number for tracking and cost management.
Applications of Batch Costing:
- Pharmaceutical Industry: Used in pharmaceutical manufacturing where products are produced in batches.
- Food Industry: Applied in food production, where similar products are manufactured in batches.
- Ready-Made Garment Factories: Common in clothing production, which is often done in batches.
- Watch Factories: Utilized in watch manufacturing for producing different types of watches in batches.
- Electronics Manufacturing: Electronic items like mobile phones, televisions, and computers are typically produced in batches.
- Spare Parts Production: Helps in tracking costs for producing spare parts while ensuring quality and budget adherence.
Advantages of Batch Costing:
- Cost Traceability: Facilitates cost identification, helping determine which batches are more expensive to produce.
- Batch Identification: Each batch is assigned a unique number, enabling easy identification of the output associated with a specific batch. For example, in the pharmaceutical industry, the batch number recorded on medicine bottles allows quick identification of products in case of safety concerns.
- Cost Averaging: Variations in costs under job costing are smoothened by averaging and spreading costs over the batch, ensuring consistent production costs.
- Efficient Supervision: Enables easy and effective supervision, reducing idle time.
- Reduced Time Loss: Minimizes the loss of time due to inter-job transfer of materials, laborers, and tools.
Batch costing is a crucial cost management technique for industries that produce goods in predetermined lots. It helps streamline production, control costs, and enhance overall efficiency.
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