Batch cost
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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].
Author: Filip Fikas
Examples of Batch cost
- Pharmaceuticals: The cost of producing batches of medicines, such as antibiotics and painkillers, must be accurately tracked to ensure that the cost of production does not significantly exceed the cost of the ingredients and labor used.
- Automotive Manufacturing: Batch costing is used to track the cost of producing batches of cars, trucks, and other vehicles. This can include the cost of materials, labor, and overhead associated with each batch of vehicles.
- Food Processing: Batch costing is used to track the cost of producing batches of food products, such as jams, sauces, and processed meats. This can include the cost of ingredients, labor, and overhead associated with each batch of food products.
- Apparel Manufacturing: Batch costing is used to track the cost of producing batches of apparel, such as shirts, dresses, and hats. This can include the cost of materials, labor, and overhead associated with each batch of apparel.
- Electronics Manufacturing: Batch costing is used to track the cost of producing batches of electronic components, such as printed circuit boards, electronic chips, and connectors. This can include the cost of materials, labor, and overhead associated with each batch of components.
Advantages of Batch cost
Batch costing is advantageous for companies that produce products in batches and store them for sale. Some of the advantages of batch costing include:
- Cost control - Batch costing allows businesses to accurately track the costs associated with producing each batch of products. This helps to ensure that resources are used efficiently and that each batch is profitable.
- Flexibility - Batch costing makes it easy to adjust production parameters depending on the market needs. This allows businesses to produce more or fewer items as needed.
- Tracking progress - Batch costing makes it easy to track progress and identify any problems that may arise during the production process. This helps to ensure the quality of the finished product.
Limitations of Batch cost
Batch costing is a popular method of job costing, however, it has some limitations. These include:
- Difficulty in determining the cost of each batch – batch costing does not provide an accurate and detailed breakdown of the cost of each batch, which can lead to inaccurate costing.
- Difficulty in determining the cost of each job – in batch costing, it can be difficult to accurately determine the cost of each job, as it is hard to assign the costs between batches.
- Inability to track changes in costs – batch costing does not take into account changes in costs that occur over time, which can lead to inaccurate costing.
- Inability to track labor costs – batch costing does not take into account the labor costs associated with each job, which can lead to inaccurate costing.
Batch cost is one type of job costing that is used when articles are manufactured in batches and held in stock for assembly or sales. Other approaches related to batch cost include:
- Process Costing - This approach is used when products are created in a continuous production process. The costs for each step in the production process are tracked and allocated to the end product.
- Activity-Based Costing (ABC) - This method is used to track costs that are associated with specific activities, such as research and development, marketing, and manufacturing. Costs are then allocated to specific products or services.
- Target Costing - This approach involves setting a target cost for a product or service, and then working backwards to design and manufacture the product or service within that cost.
In conclusion, batch costing is one type of job costing used when articles are manufactured in batches, while other approaches related to batch costing include process costing, activity-based costing, and target 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
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).
