Batch cost
Batch cost - it is a type of job costing. "Batch costing is used where articles are manufactured in definite batches and held in stock for assembly of components to produce finished product or for sales to customers generally"[1]. This is a form of costing "which applies where a large quantity of identical articles are manufactured as a batch [2]." The most popular forms of batch are [3]:
- when a customer buys a quantity of the same items, or
- where an internal industrial production order is raised for a batch of the same parts, subassemblies or products to complete supply.
In other words, costing for batches are similar to costing jobs. The batch can be perceived as a job during manufacture. Job costing relates to costing of jobs that are made to a client's particular requirements. On the other hand, batch costing is used in situation, where articles are produced in production run [4].
Under this method, the accumulation of costs are done for specific batch[5].
The cost per units is more often calculated by dividing the total batch cost by the total number of goods produced. For example, in pen manufacturing industry it may be too costly to create one pen of a particular image, at a right time to meet demand of one customer. On the other hand, manufacturing of 60,000 pens of the same design would lower the cost to a great extent. The complete pens are held in stock for the future sale on demand, stock control principles are put into place, so when the reorder level is reached, a new production order is issued[6].
The purpose of batch cost
This type of costing is the most popular in the engineering component industry, clothing and footwear manufacture and similar industries[7]. Where the process of manufacturing relating to certain goods are complex in nature, any of fundamental method of costing cannot be used for the calculation cost. So to conclude, there are 2 classes of costing methods - specific order costing and process costing. In specific order costing we can distinguish job costing and contract costing. The main fundament of process costing are batch costing, operating costing and continuous process of process costing[8].
Examples of Batch cost
- Batch cost accounting is commonly used in the manufacturing industry, where products are produced in batches. For example, a soap manufacturer may produce batches of the same type of soap in large quantities, and each batch may have different costs associated with it. The costs associated with each batch can include the cost of raw materials, labor, and overhead.
- Food processing companies also use batch cost accounting. For example, a food processing company may produce batches of canned fruits or vegetables, and each batch may have different costs associated with it, such as the cost of the fruits or vegetables, labor, and overhead.
- The pharmaceutical industry may use batch cost accounting as well. A pharmaceutical company may produce batches of a particular drug, and each batch may have different costs associated with it, such as the cost of the ingredients, labor, and overhead.
Advantages of Batch cost
Batch cost is a job costing system used for the production of items in batches. It has several advantages, including:
- Flexibility: Batch cost allows you to account for different production costs associated with individual batches of production, allowing you to make decisions about which batches to produce and how best to manage them.
- Cost control: By tracking the costs associated with individual batches, you can more easily identify areas of inefficiency and target them for cost reduction.
- Accurate costing: Because the costs associated with individual batches are tracked, the overall cost of producing a product is more accurately estimated.
- Low overhead: Batch cost requires less overhead than other job costing systems, making it a more cost-effective option for smaller businesses.
Limitations of Batch cost
Batch cost is a type of job costing which is used when articles are manufactured in batches and held in stock for assembly of components to produce a finished product or for sale to customers. However, there are a few limitations associated with this type of costing:
- Batch costing does not provide accurate cost estimates for single jobs, as it only considers the cost per batch and not the individual cost of each job.
- It can be difficult to determine the exact cost of materials used in a batch, as the cost per unit is not taken into consideration.
- The cost of labour and other overhead costs associated with manufacturing a batch of goods may not be accurately determined, as it does not take into account the amount of labour used for each job.
- The cost of production may not be accurately calculated due to certain costs not being taken into account, such as the cost of wastage and spoilage.
- It is difficult to determine the actual cost of goods sold, as the cost of goods manufactured is not taken into account.
Batch cost is one type of job costing that is used when articles are manufactured in batches and stored to be used as either components of a finished product or sold to customers. Other approaches related to batch costing are:
- Process Costing: This method of job costing is used when products are made through a series of continuous processes.
- Job Order Costing: This method is used when the production process involves one job at a time and the cost of the job is tracked from start to finish.
- Operation Costing: This method is used when the production process involves multiple operations that are performed on the same product.
In summary, batch cost is one of several job costing methods that can be used to track the cost of manufacturing and producing products. Other approaches related to batch cost include process costing, job order costing, and operation costing.
Footnotes
- ↑ B. K. Bhar, (1990), Cost Accounting methods and problems, Academic Publishers
- ↑ T. Lucey, (2002), Costing, Cengage Learning EMEA
- ↑ T. Lucey, (2002), Costing, Cengage Learning EMEA
- ↑ B. K. Bhar, (1990), Cost Accounting methods and problems, Academic Publishers
- ↑ M. Dutta (2004), Cost Accounting: Principles And Practice, Pearson Education India
- ↑ B. K. Bhar, (1990), Cost Accounting methods and problems, Academic Publishers
- ↑ T. Lucey, (2002), Costing, Cengage Learning EMEA
- ↑ M. Dutta (2004), Cost Accounting: Principles And Practice, Pearson Education India
| Batch cost — recommended articles |
| Joint product — Abc inventory classification — Indirect material — Applied overhead — Absorbed costs — Conversion cost — Process costing — Weighted average method — ABC method |
References
- Cooper, R., & Kaplan, R. S. (1991). Profit priorities from activity-based costing. Harvard business review, 69(3), 130-135.
- Hundal, M. S. (1997). Product costing: a comparison of conventional and activity-based costing methods. Journal of Engineering Design, 8(1), 91-103.
- Saniuk, A., Saniuk, S., & Witkowski, K. (2011). Using Activity Based Costing in the metalworking processes. In Conference Proceedings of 19th International Metallurgical and Materials Conference METAL 2010 (pp. 1328-1333).
Author: Filip Fikas
