Nature and use of batch costing
Batch costing is a modified form of job costing, while job costing is concerned with where articles are manufactured in definite batches. The articles are usually kept in stock for selling to customers on demand.
The term batch refers to the ‘lot’ in which the articles are to be manufactured. Whenever a particular product is required, one unit of such produced is not produced but a lot of ‘say’ 500 or 1,000 units of such product is produced. It is therefore also known as ‘Lot Costing’.
This method of costing is used in case of pharmaceutical or drug industries, ready-made garment factories, industries manufacturing component parts of radios, television sets, watches etc.
The costing procedure for batch costing is similar to that under job costing except with the different that a batch becomes the cost unit instead of a job. Separate job cost sheets are maintained for each batch of products. Each batch is allotted a number. Material requisitions are prepared batchwise, the direct labour is engaged batchwise and the overheads are also recovered batchwise. Cost per unit is ascertained by dividing the total cost of a batch number of items produced in that batch. Ordinary principles of inventory control are used. Production orders are issued only when the stock of finished goods reaches the ordering level. In case the batches are repetitive, the costing work is much simplified.
Determination of economic batch quantity
Since in batch costing, production is done in batches and each batch consists of a number of units, the determination of optimum quantity to constitute an economical batch is all the more important.
Such a quantity can be fixed on the basis of same formulae and principles as are applicable to economic ordering quantity of materials.
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