Batch Costing: Definition, Formula, Examples, & Key Differences

Batch costing is the metric used to understand and determine the cost of producing a batch of products. It uses the cost per unit produced while allocating overhead costs based on the number of units produced. Its biggest merit is its adoption of a simple calculation that precisely approximates the actual production cost.

This blog discusses batch costing, its formula, key aspects, examples, and more. It also speaks of comparing it with other metrics like job costing and process costing.

Understanding Batch Costing

A costing system that comprises costs incurred for a defined group or batch of products is called batch costing. It is determined for the production run of a group of products that are usually uniform or similar. It allows the application of a production order or even a job identification number for that group of products. 

Every batch of products is treated as a cost unit in a batch costing system. This means that the prices incurred during the production of a batch are recorded and allocated to that particular batch. It is inclusive of direct labour, materials, and overhead costs. When the expenses have been assigned to a batch, the average cost per unit can be estimated. Batch costing can be extremely complicated, and working with an experienced analyst is crucial to ensure precise cost data is recorded. 

Formula for Batch Costing

The following formula is used to calculate batch costing:

Batch costing = (Total cost incurred during goods production/ Number of units produced) x Number of units produced in that batch

For instance, if the total cost incurred in producing goods is Rs. 50,000 and the number of units produced is 500, then the batch cost will be Rs. 100 per unit. If the batch size is 100 units, the total cost would be Rs. 10,000.

The direct costs include labour, other direct expenses, materials, etc. The indirect costs include overhead costs like rent, insurance, and utilities.

Key Aspects of Batch Costing

A batch costing system estimates the cost of producing a batch of products. The key aspects of this metric include the following:

• Products are produced in groups or batches: The prices of every batch of goods produced are calculated individually.
• Direct costs are given to every batch: The direct costs include materials and labour that are allotted to every batch of goods.
• Overhead costs allocated to every batch: Factory rent, utilities, etc., are inclusive of the overhead costs that are allocated to every batch of products produced based on the proportionality of the tidal production time that the batch takes up.
• The per unit cost is calculated: The overall costs incurred during the batch production are divided by the number of units in that specific batch.
• Batch costings can be used for outside reporting: This metric can be used to report for external purposes like consumer quotes and invoicing.

Steps in Batch Costing

The batch costing method includes the following steps:

• Determining the number of units in a particular batch: This process is done by the counting method to determine the number of units in estimating the amount of material used in every batch.
• Determining the cost incurred for the raw materials in a batch: The per unit material cost is multiplied by the number of units produced in that batch.
• Determination of labour costs: The per-unit labour costs are multiplied by the number of units procured in that batch.
• Determination of the overhead costs: The calculation is done through the overhead prices per unit multiplied by the number of units produced in that batch.
• Allocation of the overall batch cost among the units in the batch: It is generally done by dividing the overall batch cost by the number of units in the batch.

Optimising Batch Sizes: Economic Batch Quantity (EBQ)

The optimum batch size that manufacturing units must make is called Economic Batch Quantity (EBQ). The batch size has a direct impact on the costs associated with it. We can segregate these costs into setting up costs and carrying costs. EBQ follows the approach of the Law of Increasing Returns and Economies of Scale.

Through the production of optimum quantities, manufacturers can minimise their production expenses. It streamlines the company’s profits. EBQ is important because of the following reasons:

• Production can be scaled based on demand
• Reduces setting-up costs
• Helps in determining the inventory
• Reduces clerical costs

Examples of Batch Costing 

Let’s look at some examples.

• Example 1

Consider a company that makes 1000 units of bulbs. The business calculates the production budget for the entire batch to estimate the cost per bulb. The costs include labour, materials, and overhead costs. It is then divided by 1000 units. If we consider the cost of one bulb as Rs.100, then the total cost of production of the lot is Rs. 1,00,000. This allows the company to determine the gain when one bulb is sold. It enables them to adjust the pricing and quantity of production for better gains. 

• Example 2

Suppose a car manufacturing company produces cars in batches known as production runs; they estimate the total prediction budget that includes all raw materials, labour, and overhead costs. This is divided by the number of units produced to determine the price per unit. It helps them determine the selling price along with estimating the gain. 

Pros and Cons of Batch Costing

The pros of batch costing are as follows:

• This metric is crucial for companies that produce products in batches as they assign a certain cost to every batch. It makes cost traceability easier and helps determine which batch is expensive. 
• This metric is also handy for companies that make different products, as it allows them to track the cost of every product’s production. This data can be used to determine the selling price and make other business decisions. 
• It is a simple method and does not need much information to be tracked. It is easy to maintain and implement.
• It provides crucial information useful in decision-making.

The cons of batch costing are listed below:

• This method can be time-consuming and expensive as every batch needs estimation.
• Tracking of direct and indirect costs can be a challenge.
• It creates opportunities for the organisation to manipulate costs to improve their department’s performance.
• It distorts the decision-making process.

Comparing Batch Costing with Job Costing

The table below highlights the key differences between batch costing and job costing. 

Batch Costing	Job Costing
When identical products are produced in large numbers, batch costing is used.	When products produced in every batch are unique, job costing is used.
Costs are estimated for a batch or group of products.	Costs are estimated for every job or order.
These are meritorious when economies of scale exist. It minimises the overall cost per unit.	These are meritorious when every customer’s order is different. It is more accurate.
The cost is fixed for every batch, irrespective of the number of units produced.	The costs can be varied based on the job requirements.

Distinguishing Batch Costing and Process Costing

Let’s look at the key differences between batch costing and process costing.

Batch Costing	Process Costing
Used during the production of a large number of identical products.	Used when products or services produced are standardised or subjected to continuous flow production.
Costs are gathered for every lot or batch.	Costs are accumulated for every single stage of the production process.
Every batch is uniquely identified and different from the other.	The products made are uniform.
The total cost incurred is divided by the number of units produced to determine the cost per unit.	The total cost incurred at every stage is divided by the number of units produced in that period to determine the cost per unit.

Conclusion

The metric used to analyse and estimate the cost of creating a batch of goods is called batch costing. Using cost per unit generated while distributing overhead costs based on the quantity produced is a key component of batch costing. The primary advantage of this metric is its straightforward computation, which provides an accurate estimation of the manufacturing cost.

Batch costing is an alternative method of work costing that is quite similar to job costing. While job costing is concerned with figuring out the cost of finishing work by customer standards, batch costing concentrates on a set of identical products produced for the company’s stock. It employs a costing procedure much like work costing.