Chapter 8: Job (In Syllabus) and

Batch Costing (Not in Syllabus)

Job Costing

Introduction

Jobs are performed within the working establishment (sometimes at the place of the customer also) and
are generally of short duration or can be completed during a short time. Even jobs can be carried out at
the premises of the customer like furniture work. Some areas where the job costing can be performed to
ascertain the cost are—furniture making, stitching, printing, etc.
To ascertain the cost of any job we prepare the cost sheet on the same lines as we have discussed in the
chapter Single or Unit or Output Costing. Every job is assigned a number. In case there is a single unit in
the job then the total cost arrived at after preparing the cost sheet is the total cost of the job. But in case
number of units is more than one then we can divide the total cost of the job by the number of units
obtained from that job to arrive at the cost per unit.
𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑡ℎ𝑒 𝐽𝑜𝑏
𝐶𝑜𝑠𝑡 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡 =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑈𝑛𝑖𝑡𝑠 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑 𝑜𝑟 𝑂𝑏𝑡𝑎𝑖𝑛𝑒𝑑 𝑓𝑟𝑜𝑚 𝑡ℎ𝑒 𝐽𝑜𝑏
STUDENTS CAN READ THE THEORETICAL ASPECT OF THIS CHAPTER FROM THE BOOK.
Following theoretical question can appear from this topic in the paper:
Q 1. Explain the job costing.
Q 2. Features of the job costing.

Practical Questions

Illustration 1

The following information has been taken from the costing records of a company in respect of job
number 123.
Material ₹4,010
Wages:
Department A 60 Hours @ ₹3 Per Hour
Department B 40 Hours @ ₹2 Per Hour
Department C 20 Hours @ ₹5 Per Hour
Overheads are recovered for the three departments as follows:
Department A ₹5,000 for 5,000 Hours
Department B ₹3,000 for 1,500 Hours
Department C ₹2,000 for 500 Hours
Fixed overheads are ₹14,000 for 7,000 Hours
You are required to calculate the cost of job number 123 and also calculate the price to be charged so
as to give a profit of 25% on the selling price.

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Solution

In this question, because for the job the amount of material and wages are given, so in order to absorb
the overheads i.e. fixed and variable, there is need that first of all we calculate the overhead
Absorption Rates. How to calculate these rates and how to absorb the overheads for the job is
explained as follows (Within the cost sheet the absorption is given and the calculation of rates for the
absorption is given in the working notes.):
JOB COST SHEET
Job Number: 123 Date of Commencement: …………………
Description: ………………… Date of Completion: …………………………

Particulars Amount (₹)

Material 4,010
Direct Wages
Department A 60 Hours @ ₹3 Per Hour ₹180
Department B 40 Hours @ ₹2 Per Hour ₹80
Department C 20 Hours @ ₹5 Per Hour ₹100 360
PRIME COST 4,370
Add: Factory Overheads:
Fixed Overheads (60 Hours + 40 Hours + 20 Hours) @ ₹2 Per Hour [WORKING
NOTE – 1] 240
Variable Overheads [WORKING NOTE – 2]
Department A 60 Hours @ ₹1 Per Hour ₹60
Department B 40 Hours @ ₹2 Per Hour ₹80
Department C 20 Hours @ ₹4 Per Hour ₹80 220
TOTAL COST 4,830
Profit (25% of the selling Price) [WORKING NOTE – 3] 1,610
SELLING PRICE 6,440
WORKING NOTES:
1. Calculation of Fixed Overheads Absorption Rate
Fixed Overheads Absorption Rate=₹14,000 / 7,000 Hours =₹2 Per Hour
2. Calculation of Variable Overheads Absorption Rate Department: A = ₹5,000 / 5,000 Hours
= ₹1 Per Hour, Department B = ₹3,000 / 1,500 Hours = ₹2 Per Hour, Department C = ₹2,000 /
500 Hours = ₹4 Per Hour
3. Calculation of Profit (which is 25% on selling price)
Profit = Total Cost  Percentage / (100 – Percentage) = ₹4,830  25 / (100 – 25) = ₹1,610

Illustration 2

The information given below has been taken from the cost records of an engineering works in respect of
Job No. 303.
Materials: ₹8,020
Wages: Department A—20 hours at ₹8 per hour
Department B—80 hours at ₹4 per hour
Department C—240 hours at ₹10 per hour
The overhead expenses are as follows:
Variable:
Department A—₹20,000 for 5.000 labor hours
Department B — ₹12,000 for 1,500 labor hours
Department C—₹8,000 for 500 labor hours
Fixed: ₹20,000 for 10,000 working hours
Calculate the cost Job No. 303 and price for the job to give a profit of 25 per cent on the selling price.

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 [B. Com., University of Delhi, 2004 (Supplementary)]

Solution

In this question, because for the job the amount of material and wages are given, so in order to absorb
the overheads i.e. fixed and variable, there is need that first of all we calculate the overhead Absorption
Rates. How to calculate these rates and how to absorb the overheads for the job is explained as follows
(Within the cost sheet the absorption is given and the calculation of rates for the absorption is given in
the working notes.):
JOB COSTS SHEET
Job Number: 123 Date of Commencement: …………………
Description: ………………… Date of Completion: …………………………

Particulars Amount (₹)

Material 8,020
Direct Wages:
Department A 120 Hours @ ₹8 Per Hour ₹960
Department B 80 Hours @ ₹4 Per Hour ₹320
Department C 40 Hours @ ₹10 Per Hour ₹400 1,680
PRIME COST 9,700
ADD: Factory Overheads:
Fixed Overheads (120 Hrs + 80 Hrs + 40 Hrs) @ ₹2 Per Hour [W. NOTE – 1] 480
Variable Overheads [WORKING NOTE – 2]
Department A 120 Hours @ ₹ 4 Per Hour ₹480
Department B 80 Hours @ ₹8 Per Hour ₹640
Department C 40 Hours @ ₹16 Per Hour ₹640 1,760
TOTAL COST 11,940
Profit (25% of the selling Price) [WORKING NOTE – 3] 3,980
SELLING PRICE 15,920
WORKING NOTES:
1. Calculation of Fixed Overheads Absorption Rate
Fixed Overheads Absorption Rate=₹20,000 / 10,000 Hours =₹2 Per Hour
2. Calculation of Variable Overheads Absorption Rate
Department A = ₹20,000 / 5,000 Hours = ₹4 Per Hour; Department B = ₹12,000 / 1,500 Hours
= ₹8 Per Hour; Department C = ₹8,000 / 500 Hours = ₹16 Per Hour
3. Calculation of Profit (which is 25% on selling price)
Profit = Total Cost  Percentage / (100 – Percentage) = ₹11,380  25 / (100 – 25) = ₹3,980

Illustration 3

From the following particulars, prepare the Cost Sheet for Job No. 75 and find out the value of the Job.
Material issued for the job ₹600
Productive wages ₹4,600
Direct expenses ₹500
Provide 60% on productive wages for works on cost and 12½% on works cost for office on cost. Profit
to be realized on the selling price is 15%.
[B. Com., University of Delhi, 2005 (Regular)]

Solution

This question is basically based on the technique of single or output costing. In this question there is no
need to calculate the overhead absorption rates because these are already given in the statement.

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Works/Factory Overheads are 60% of the Direct Wages and Office and Administrative Overheads
(General) are 12.5% of the Factory/Works Cost. The profit is 15% on the selling price and formula for
that is—Total Cost  Profit % / (100 – Profit %)
JOB COST SHEET
Job Number: 75 Date of Commencement: …………………
Description: ………………… Date of Completion: …………………………

Particulars Amount (₹)

Material 6,000.00
Productive Wages 4,600.00
Direct Expenses 500.00
PRIME COST 11,100.00
Add: Works on Cost (Works Overheads) is 60% on Productive Wages i.e. (4,600  60%) 2,760.00
FACTORY COST/WORKS COST 13,860.00
Add: Office on Cost (Office overheads) is 12.5% on Works Cost i.e. (13,680  12.5%) 1,732.50
TOTAL COST 15,592.50
Profit (15% of the selling Price) i.e. [15,592.50  15 / (100 – 15)] 2,751.62
SELLING PRICE 18,344.12

Illustration 4

The following is the budget of Superb Engineering Works for the year 2019:
Factory overheads : ₹62,000
Direct labor cost : ₹77,500
Direct labor hours : 15,500 hours
Machine hours : 50,000 hours
From the above figures, find the overhead application rates using the following methods:
(i) Direct labor hour,
(ii) Direct labor cost, and
(iii) Machine hours
Prepare a comparative statement of cost, showing the result of application of each of the above rates of
Job No. 555 from the under-mentioned data:
Direct material cost : ₹45
Direct labor wages : ₹50
Direct labor hours : 12
Machine hours : 30
[B. Com., University of Delhi, 2008 (Regular)]

Solution

First of all, calculate various rates using the information given in the statement in the following manner:
1. Direct Labor Hour Rate = Factory Overheads / Direct Labor Hours = ₹62,000 / 15,500 Hours =
₹4 Per Hour
2. Direct labor Cost Method = Factory Overheads /Direct labor Cost  100 = ₹62,000 / ₹77,500 
100 = 80%
3. Machine Hour Rate = Factory Overheads / Machine Hours = ₹62,000 / 50,000 Hours = ₹1.24
Per Hour
After calculating the various factory overheads absorption rates using the methods as mentioned in
the question, the factory overheads shall be absorbed for the given job.
Note: All the above methods have already been calculated in detail in the chapter Overheads.
COST SHEET

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 Material (i) Direct Labor Hour (ii) Direct Labor Cost (iii) Machine Hour Rate
Method method Method
Material 45 45 45.0
Labor 50 50 50.0
PRIME COST 95 95 95.0
Add: Overheads [WORKING NOTE – 1] 48 [WORKING NOTE – 2] 40 [WORKING NOTE – 3]
37.2
TOTAL COST 143 135 132.2
Working Notes:
1. Direct Labor Hours  Direct Labor Hour Rate = 12 Hours  ₹4 per Hour = ₹48
2. Direct Labor Cost  80% = ₹50  80% = ₹40
3. Machine Hours  Machine Hour Rate = 30 Hours  ₹1.24 Per Hour = ₹37.2

Illustration 5

The following information relates to the activities of a production department for a certain period in a
factory.
Material consumed : ₹72,000
Direct wages : ₹60,000
Hours of machine operation : 20,000
Labor hours worked : 24,000
Overheads chargeable to Dept. : 48,000
On one order carried out in the department during the period, the relevant data were:
Material consumed : ₹4,000
Direct wages : ₹3,300
Labor hours : 1,650
Machine hours : 1,200
Prepare a comparative statement of cost of this order by using the following three methods of recovery
of overheads: (i) Direct labor hour method; (ii) Direct labor cost method; and (iii) Machine hour rate
method.
[B. Com., University of Delhi, 2008]

Solution

First of all, calculate various rates using the information given in the statement in the following manner:
4. Direct Labor Hour Rate = Factory Overheads / Direct Labor Hours = ₹48,000 / 24,000 Hours =
₹2 Per Hour
5. Direct labor Cost Method = Factory Overheads /Direct labor Cost  100 = ₹48,000 / ₹60,000 
100 = 80%
6. Machine Hour Rate = Factory Overheads / Machine Hours = ₹48,000 / 20,000 Hours = ₹2.4 Per
Hour
After calculating the various factory overheads absorption rates using the methods as mentioned in
the question, the factory overheads shall be absorbed for the given job.
Note: All the above methods have already been calculated in detail in the chapter Overheads.
COST SHEET
Material (i) Direct Labor Hour (ii) Direct Labor Cost (iii) Machine Hour Rate
Method method Method
Material 4,000 4,000 4,000
Labor 3,350 3,350 3,350
PRIME COST 7,300 7,300 7,300
Add: Overheads 3,300 2,640 2,880

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 [WORKING NOTE – 1] [WORKING NOTE – 2] [WORKING NOTE – 3]
TOTAL COST 10,600 9,940 10,180
Working Notes:
4. Direct Labor Hours  Direct Labor Hour Rate = 1,650 Hours  ₹2 per Hour = ₹3,300
5. Direct Labor Cost  80% = ₹3,300  80% = ₹2,640
6. Machine Hours  Machine Hour Rate = 1,200 Hours  ₹2.4 Per Hour = ₹2,880

Illustration 6

The following information in respect of job number 333 is given.

Material ₹5,800
Wages:
Department A 100 Hours @ ₹5 Per Hour
Department B 200 Hours @ ₹3 Per Hour
Overheads of two departments are estimated as follows:
(i) Variable overheads:
Department A ₹10,000 for 5,000 Direct Labor Hours
Department B ₹30,000 for 10,000 Direct Labor Hours
(ii) Fixed overheads: ₹50,000 for 50,000 normal working hours
You calculate the cost of this job and also the price to be charged so as to give a profit of 20% on the
selling price.
[B. Com., University of Delhi, 2019 (SOL)]

Solution:

This is same as question number 1. Only figures are different and instead of three there are only two
departments viz. A and B. Further the percentage of profit on sales is 20% instead of 25%. Following is
the cost sheet:
JOB COST SHEET
Job Number: 333 Date of Commencement: …………………
Description: ………………… Date of Completion: …………………………

Particulars Amount (Rs.)

Material 5,800
Direct Wages:
Department A 100 Hours @ ₹5 Per Hour ₹500
Department B 200 Hours @ ₹3 Per Hour ₹600 1,100
PRIME COST 6,900
Add: Factory Overheads: 300
Fixed Overheads (100 Hours + 200 Hours) @ ₹1 Per Hour [WORKING NOTE –
1]
Variable Overheads [WORKING NOTE – 2]
Department A 100 Hours @ ₹2 Per Hour ₹200 800
Department B 200 Hours @ ₹3 Per Hour ₹600
TOTAL COST 8,000
Profit (20% of the selling Price) [WORKING NOTE – 3] 2,000
SELLING PRICE 10,000
WORKING NOTES:
1. Calculation of Fixed Overheads Absorption Rate
Fixed Overheads Absorption Rate=₹50,000 / 50,000 Hours =₹1 Per Hour
2. Calculation of Variable Overheads Absorption Rate: Department A = ₹10,000 / 5,000 Hours
= ₹2 Per Hour, Department B = ₹30,000 / 10,000 Hours = ₹3 Per Hour

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 3. Calculation of Profit (which is 20% on selling price)
Profit = Total Cost  Percentage / (100 – Percentage) = ₹8,000  20 / (100 – 20) = ₹2,000

Illustration 7

The following direct costs were incurred on a Job number 121 of a company.
Material ₹6,010
Wages:
Department A 60 Hours @ ₹30 Per Hour
Department B 40 Hours @ ₹20 Per Hour
Department C 20 Hours @ ₹50 Per Hour
Overheads for these 3 departments were estimated as follows:
Variable overheads:
Department A ₹15,000 for 1,500 Hours
Department B ₹4,000 for 200 Hours
Department C ₹12,000 for 300 Hours
Fixed overheads:
Estimated at ₹40,000 for 2,000 normal working hours.
Calculate the cost of Job 121 and calculate the price to give profit of 25% on selling price.
[B. Com., University of Delhi, 2023]

Solution

In this question, because for the job the amount of material and wages are given, so in order to absorb
the overheads i.e. fixed and variable, there is need that first of all we calculate the overhead
Absorption Rates. How to calculate these rates and how to absorb the overheads for the job is
explained as follows (Within the cost sheet the absorption is given and the calculation of rates for the
absorption is given in the working notes.):
JOB COST SHEET
Job Number: 123 Date of Commencement: …………………
Description: ………………… Date of Completion: …………………………

Particulars Amount (₹)

Material 6,010
Direct Wages
Department A 60 Hours @ ₹30 Per Hour ₹1,800
Department B 40 Hours @ ₹20 Per Hour ₹800
Department C 20 Hours @ ₹50 Per Hour ₹1,000 3,600
PRIME COST 9,610
Add: Factory Overheads:
Fixed Overheads (60 Hours + 40 Hours + 20 Hours) @ ₹20 Per Hour
[WORKING NOTE – 1] 2,400
Variable Overheads [WORKING NOTE – 2]
Department A 60 Hours @ ₹10 Per Hour ₹600
Department B 40 Hours @ ₹20 Per Hour ₹800
Department C 20 Hours @ ₹40 Per Hour ₹800 2,200
TOTAL COST 14,210
Profit (25% of the selling Price) [WORKING NOTE – 3] 4,737
SELLING PRICE 18,947
WORKING NOTES:
1. Calculation of Fixed Overheads Absorption Rate
Fixed Overheads Absorption Rate=₹40,000 / 2,000 Hours =₹20 Per Hour

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 2. Calculation of Variable Overheads Absorption Rate Department: A = ₹15,000 / 1,500 Hours
= ₹10 Per Hour, Department B = ₹4,000 / 200 Hours = ₹20 Per Hour, Department C = ₹12,000 /
300 Hours = ₹40 Per Hour
3. Calculation of Profit (which is 25% on selling price)
Profit = Total Cost  Percentage / (100 – Percentage) = ₹14,210  25 / (100 – 25)  ₹4,737

Illustration 8

In respect of a factory, the following particulars have been extracted for the year 2018:
Cost of materials ₹6,00,000
Wages ₹5,00,000
Factory overheads ₹3,00,000
Administrative charges (Related to production) ₹3,36,000
Selling charges ₹2,24,000
Distribution charges ₹1,40,000
Profit ₹4,20,000
A work order has to be executed in 2019 and the estimated expenses are: Materials ₹8,000, Wages
₹5,000. Assuming that in 2019 the rate of factory overheads has gone up by 20%, distribution charges
have gone
down by 10% and selling and administration charges have gone up by 15%, at what price should the
product be sold so as to earn the same rate of profit on the selling price as in 2018. Factory overheads
are based on wages and administration, selling and distribution overheads on works cost.
[B. Com., University of Delhi, 2007 (SOL), B. Com. Honors, University of Delhi 2016]

Solution

Please refer to the chapter Single or Output Costing. The question is same except that some figures are
different. However, following is the solution:
First of all, prepare the old cost sheet. Because in this question the amount of direct material
and direct wages are given for the work order which is to be executed in year 2019, so in order
to calculate the selling price, we need to establish some relationships among some variables so
that the overheads can be absorbed (Absorption has already been discussed in the chapter
Overheads). Let us establish these relationships one by one.
First of all:
1. Factory overheads shall be absorbed/expressed as a percentage of direct wages:
Percentage of Factory Overheads= Factory Overheads /Direct Labor Cost of Last Year  100=
3,00,000 / 5,00,000  100 = 60%
2. Administrative Overheads shall be absorbed/expressed as a percentage of the works
cost:
Percentage of Administrative Overheads= Adm. Overheads / Works Cost of Last Year  100=
3,36,000 / 14,00,000  100 = 24%
3. Selling Overheads shall be absorbed/expressed as a percentage of the works cost:
Percentage of Selling Overheads= Selling Overheads / Works Cost of Last Year  100= 2,24,000 /
14,00,000  100 = 16%
4. Administrative Overheads shall be absorbed/expressed as a percentage of the works
cost:
Percentage of Distribution Overheads = Distribution. Overheads / Works Cost of Last Year 
100= 1,40,000 / 14,00,000  100 = 10%
5. Percentage of Profit on Total Cost: Profit / Total Cost  100 = 4,20,000 / 21,00,000  100 =
20%
6. Percentage of Profit on Sales: Profit / Sales  100= 4,20,000 / 21,00,000  100 = 16.67%

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 7. Further the increase or decrease in a particular overhead is already given in the question
i.e. 20% increase in the factory overheads, 15% increase in the Administrative Overheads, 15%
increase in Selling Overheads and 10% decrease in Distribution Overheads.
EXISTING COST SHEET
Particulars Amount Remarks
Cost of Material 6,00,000
Wages 5,00,000
PRIME COST 11,00,000
Add: Factory Overheads 3,00,000 60% of Wages
NET WORKS COST 14,00,000
Add: Administrative Charges 3,36,000 24% of Factory Cost
COST OF PRODUCTION 17,36,000
Add: Selling Charges 2,24,000 16% of Factory Cost
Add: Distribution Charges 1,40,000 10% of Factory Cost
COST OF SALES 21,00,000
Add: Profit 4,20,000 20% of Total Cost or 16.67% on Selling Price
SALES 25,20,000

COST SHEET FOR THE WORK ORDER WHICH HAS TO BE EXECUTED IN THE YEAR 2019
Particulars Amount Remarks
Cost of Material 8,000.0
Wages 5,000.0
PRIME COST 13,000.0
Add: Factory Overheads 3,600.0 (Direct Wages  60%) + 20%= (₹5,000  60%) + 20% Increase
NET WORKS COST 16,600.0
Add: Administrative Charges 4,581.6 (Factory Cost  24%) + 15% = (₹16,600  24%) + 15% Increase
COST OF PRODUCTION 21,181.6
Add: Selling Charges 3,054.4 (Factory Cost  16%) + 15% = (₹16,600  16%) + 15% Increase
Add: Distribution Charges 1,494.0 (Factory Cost  10%) - 10% = (₹16,600  10%) - 10% Decrease

COST OF SALES 25,730.0

Add: Profit (see note) 5,146.0 20% of Total Cost or 16.67% on Selling Price
SALES 30,876.0
Note:
Profit is 20% on Cost = Total Cost  20 / 100 = ₹25,730  20 / 100 = ₹5,146
Profit is 16.67% on Sales = Total Cost  16.67 / (100 – 16.67) = 25,730  16.67 / (100 – 16.67)
= ₹5,146

Day - 2
Batch Costing

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Batch Costing (Not in Syllabus)
STUDENTS CAN ALSO READ THE THEORETICAL ASPECT OF THIS FROM THE BOOK. Following
theoretical question can appear from this topic in the paper:
Q 1. Explain the batch costing.
Q 2. Features of the batch costing.

Introduction

When articles are produced in groups or when a large number of articles are manufactured in one
setting of machines or tools due to their similar nature, design, color, or size, the process is referred to
as Batch Costing or Lot Costing. In this method, similar orders from different customers are combined
into a single lot for production purposes. Another significant reason for manufacturing products in
batches is the limitation of production capacity. It is not feasible to produce an unlimited quantity at
once.
For example, the capacity of the production vessel (or kettle) is limited in the production of cough
syrup. If the vessel is used 10 times in a day, then 10 distinct batches will be produced, with each batch
assigned a specific batch number. Batch numbers are essential for differentiating one batch from
another and are particularly useful in identifying any issues or problems with specific batches.
A simple example of the importance of batch numbering can be seen in the case of a cough syrup.
If a particular batch of the syrup has a problem, the batch number helps identify and recall only
those bottles. This ensures that defective products can be isolated and removed from the market
without affecting other batches.
Batch costing is primarily used when articles are manufactured in specific batches. It is considered a
modified version of job costing. While this method is applicable across most industries, it is generally
not used when production occurs strictly according to the instructions and specifications provided by
individual customers.
Industries where batch costing is widely employed include pharmaceuticals, food manufacturing,
garment production, spare parts manufacturing, liquor, beverages, and many others.

Features of Batch Costing

The following are main features of batch costing:

1. Each batch is a cost unit.
2. All units produced as part of a batch are identical.
3. Each batch is to be costed separately.
4. Each batch generally involves a set up Cost.
5. Set up cost for each batch is more or less same irrespective of size of the batch.
6. Higher the size of a batch, lower is cost per unit.
7. Cost per unit may differ in case of different batches, though the size of the batch is same because
of changes in production conditions and input costs.
8. Batch production is generally for stock.
9. In case the policy of the firm is to have batches of equal size, the size of the batch is equal to
annual output requirement of the product divided by the number of batches.
10. Larger the batch size. longer is the time interval between batches.
11. The method is used where small parts are produced in significantly large number.
12. The advantage of the method is that cost and profit per unit can be known without preparing
cost sheet for each unit but by determining cost of the batch as a whole and dividing it by
number of units constituting the batch.
13. Where the size of batch differs frequently. it becomes difficult to ascertain equitable charge to

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 the batch for various types of overheads.

Benefits of Batch Costing

Manufacturing in batches offers several benefits, particularly for industries where production processes
and resource optimization are crucial. Here are some key advantages:
1. Efficient Use of Resources: Batch manufacturing allows companies to make optimal use of
equipment, labor, and materials. Instead of setting up machines repeatedly for each product,
multiple units are produced in one setup, saving time and reducing costs.
2. Reduced Setup Costs: Setting up machinery for production can be time-consuming and
expensive. By producing items in batches, the frequency of setups decreases, leading to
significant cost savings.
3. Easier Quality Control: Batches make it simpler to monitor and inspect product quality. If an
issue is identified, it can be traced to a specific batch, minimizing the scope of defective products
and enabling quick corrective actions.
4. Customization Flexibility: Batch production accommodates variations in product design, size,
or features. Companies can easily adapt production to meet specific customer orders without
disrupting the overall process.
5. Inventory Management: Producing in batches ensures that companies can maintain an
adequate stock of products without overproducing. It balances supply and demand, preventing
shortages or excess inventory.
6. Cost Savings on Bulk Purchasing: Producing items in batches often requires bulk
procurement of raw materials, which can lead to cost discounts and better supplier agreements.
7. Improved Tracking and Accountability: Batch numbers make it easy to trace products
throughout the manufacturing and distribution process. This helps identify defective batches,
recall products if necessary, and maintain accountability.
8. Scalability: Batch production allows companies to scale their output based on demand. They
can produce smaller or larger batches depending on market needs, ensuring flexibility in
production.
9. Minimized Wastage: With batch production, companies can test a smaller lot before full-scale
manufacturing. This helps reduce errors, avoid wastage, and refine processes for better
efficiency.
10. Cost Efficiency for Limited Capacity: For businesses with limited production capacity, batch
manufacturing enables the completion of smaller orders without overloading machines or labor
resources.
Overall, batch production strikes a balance between mass production and customized production,
offering efficiency, quality control, and cost-effectiveness.

Economic Batch Quantity

An important problem in batch costing relates to determining the optimum size of the batch or the time
interval after which an equal sized batch should be repeated. Given an annual demand. larger the size of
a batch, longer is the time interval between batches and vice versa. The optimum batch size is one which
results in minimum total cost, i.e., where sum total of production cost and stock holding costs is least.
Economic Batch Quantity (EBQ) is guided by two sets of costs:
(a) Setting-up Costs: These are the costs relating to preparation for starting new batch of
production, e.g., setting the machines and tools for a particular batch, cleaning the plant and
machinery, wastage of materials due to a change in machine feeding, defectives at the start of a
batch production, cost of time lost in change over from one batch to another, loss of speed of
work, etc. Setting up cost remains constant irrespective of batch size. Therefore, larger the batch
size lower is per unit Setting up cost and vice versa.

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 (b) Carrying Cost: This includes cost of capital blocked in inventories and storage costs, such as
rent. insurance, pilferage, obsolescence, etc. Larger the batch size, larger will be the average
inventory held and therefore larger will be the total carrying cost for the year, and vice versa.
Following formula is used to calculate the Economic Batch Quantity (EBQ)
2𝐴𝑆
𝐸𝐵𝑄 = √
𝐶
Where,
A = Annual Demand in Units;
S = Setting-up Cost Per Batch (This is assumed to be constant Per Batch);
C = Carrying Cost of Holding Cost Per Unit Per Annum
Note: It is calculated on the same principles which are applicable for the determination of Economic
Order Quantity of the Material.

Calculation of Cost Per Unit

To calculate the cost per unit, we divide the cost of the particular batch by the quantity of that batch. So,
cost per unit = Cost of the Batch / Unit manufactured in that Batch.

Illustration 1

Annual Demand = 6,000 Units; Cost Per Unit = ₹20; Setting-up Cost = ₹60 per Batch; Carrying Cost =
10% per annum

Solution

2 × 6,000 𝑈𝑛𝑖𝑡𝑠 × ₹60

𝐸𝐵𝑄 = √
₹20 × 10%
Number of Batches= Annual Demand / EBQ = 6,000 Units / 600 units = 10 Batches
Total Carrying Cost= EBQ  Cost Per Unit  ½  Percentage of Carrying Cost = 600 Units  ₹20  ½ 
10% = ₹600
Total Setting-up Cost= Number of Batches  Setting-up Cost Per Batch = 10 Batches  ₹60 Per Batch =
₹600

Illustration 2

Annual Demand 4,000 Units 8,000 Units

Setting-up Cost ₹50 per batch ₹200 per batch
Carrying Cost 10% 20%
Cost Per Unit ₹100 ₹100
Calculate economic batch quantities.

Solution

2𝐴𝑆 2 × 4,000 𝑈𝑛𝑖𝑡𝑠 × ₹50 2 × 8,000 𝑈𝑛𝑖𝑡𝑠 × ₹200

𝐸𝐵𝑄 = √ 𝐸𝐵𝑄 = √ 𝐸𝐵𝑄 = √
𝐶 ₹100 × 10% ₹100 × 10%
Number of Batches = 4,000 Units / 200 Units = 20 batches 8,000 Units / 400 Units = 20 batches
AnnualDemand / EBQ

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Total Setting-up Cost = 20 Batches  ₹50 = ₹1,000 20 Batches  ₹200 = ₹4,000
Number of Batches 
Setting-up Cost Per Batch
Carrying Cost = EBQ  200 Units  ₹100  ½  10% = Rs. 400 Units  ₹100  ½  20% = Rs.
Cost Per Unit½  % of 1,000 4,000
Carrying Cost

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