What is Batch Costing? Definition, Characteristics and Examples

Batch Costing Definition

Batch costing is a method of cost accounting used to calculate the total and unit cost of producing goods in a batch.

 

A “batch” refers to a specific quantity of identical or similar products that are manufactured together.

 

Unlike job costing, which focuses on custom, made-to-order products or projects where specifications vary, batch costing focuses on groups of units produced together.

batch costing

Characteristics of Batch Costing

Batch costing has several typical characteristics:

 

  • Uniformity: The products in a batch are similar in design, function, and production process.
  • Batch Size: The number of units in a batch is predetermined.
  • Cost Allocation: The entire batch is treated as a single cost, and then divided by the number of units to find the cost per unit.

 

Batch costing is commonly used in industries like pharmaceuticals, food processing, electronics, and clothing.

Types of Batch Costs

There are different types of costs often attributable to the batch production:

 

  • Direct Material Costs – Costs of raw materials specifically used for the production of the batch, such as fabric for clothing or ingredients for baked goods.
  • Direct Labour Costs – Wages paid to workers directly involved in producing the batch, such as machine operators or assembly line workers.
  • Direct Expenses – Other costs directly related to the batch, like special tools and moulds used exclusively for the production.
  • Setup Costs – Fixed costs incurred in preparing machinery and equipment for the batch.
  • Manufacturing Overheads – Indirect costs such as electricity, equipment maintenance, and factory rent, allocated to the batch based on usage metrics like machine hours or labour hours.
  • Inspection and Quality Control Costs – Costs related to ensuring the batch meets quality standards, including labour and equipment for inspections.
  • Packaging Costs – Costs of materials and labour for packaging the goods in the batch, such as boxes, labels or wrapping.

Batch Costing Example

Let’s now look at a real world example to further help understanding.

 

Imagine a toy manufacturer produces a batch of 500 toy cars.

 

The following costs are incurred:

Direct Material Cost

£2,000

Direct Labor Cost

£1,000

Overheads

£500

Setup Cost

£300

We now need to find the total cost of the batch, then we can divide this by the number of units in the batch to find the unit cost.

 

Total Batch Cost = Direct Material + Direct Labor + Overheads + Setup Total Cost

Total Batch Cost = £2,000 + £1,000 + £500 + £300 = £3,800

 

Unit Cost = Total Batch Cost / Batch Size

Unit Cost = £3,800 / 500 = £7.60 per toy car

 

This means that producing each toy car in this batch costs £7.60.

 

These calculations can help the manufacturer set a competitive selling price while ensuring they are still profitable.

Advantages of Batch Costing

Batch costing offers several benefits for businesses:

Simplified Cost Allocation

Batch costing makes it easier to allocate costs to products, as all items in a batch share the same cost structure.

 

For instance, the total cost of raw materials for a batch of 500 identical shirts can be divided evenly, making it simple to determine the cost per shirt.

Economies of Scale

Producing goods in batches allows companies to purchase raw materials in bulk, often at discounted rates, which lowers overall production costs.

 

These savings improve profitability while maintaining competitive pricing for customers.

Budgeting and Forecasting

Batch costing gives businesses valuable insights into their production costs, helping them to predict future expenses and revenue more accurately.

 

With a good understanding of costs for each batch, business can create realistic budgets and set competitive prices.

Disadvantages of Batch Costing

While batch costing can be beneficial to business, it also comes with several drawbacks to consider:

Inflexibility

Batch costing can be rigid, especially when minimum batch quantities are set higher than the actual demand.

 

For example, if the minimum batch size is 5,000 units but only 500 units are needed, it may lead to overproduction and unnecessary costs.

Setup Costs

Batch production often requires significant setup costs, such as adjusting machinery, preparing workstations and organising materials.

 

For example, changing machine settings or configuring equipment to produce a different product can be time consuming and costly.

 

For small batches, these setup costs may be higher than the benefits, making production less economical.

Storage Costs

Large batch production can result in excess inventory, especially if demand does not meet expectations.

 

Storing surplus products increases warehouse costs, ties up capital, and raises the risk of inventory obsolescence.

Wastage

Batch production can lead to wastage of materials if production quantities exceed actual requirements or if there are leftover raw materials that cannot be reused.

 

Additionally, if a defect arises during production, the issue often affects the entire batch rather than individual units.

 

This can lead to significant losses in costs and time, as the defective batch would have to be reworked or discarded.