Batch costing is a form of specific order costing in which the costs of separately identifiable units are determined. The separately identifiable unit is a batch of related products. Keep in mind that the units inside the batch are identical to each other but each batch can be different.
Just like we assign a job number to each separately identifiable job in the job costing method, a batch number is assigned to each different batch. This batch number helps to pool the costs incurred on each batch. The total costs are then divided by the number of units in the batch to calculate the cost per unit in a batch. The selling price of a batch is calculated similarly to the job costing system i.e., we add a profit mark-up/margin to the total cost of the batch. This gives the total sales value of the batch. When the total sales value of the batch is divided by the total number of units, it gives the selling price per unit in the batch.
There are two steps to calculate the cost/selling price per unit in a batch costing system.
- Calculate the total cost/sales value of the batch.
- Divide the total cost/sales value by the total number of units in the batch.
The total cost and sales value of a batch are calculated by using the following format:
Explanation – Batch costing
To understand the concept of batch costing, let us take the example of Cakes n Bakes Limited, a bakery business. The company prepares cakes of different flavors and sizes. All these different cakes are manufactured in batches. A single batch consists of 15 cakes of the same flavor and size. For the upcoming week, the management of Cakes n Bakes is considering the introduction of marble cakes to their menu. They have estimated that it takes 10kg of raw material for a batch of marble cakes costing $5 per kg. The chef has to spend a total of 5 hours per batch of marble cake and is paid $20 per hour. Production overheads are 50% of the prime cost of the batch of marble cakes. Non-production overheads are absorbed at the rate of $3 per labour hour. Management wants to include a 25% profit mark-up in the total cost of the batch to arrive at the selling price.
We can calculate the total cost and selling price per cake by listing all the costs one by one, adding them to get the total cost and finally adding the profit element. This is shown below:
Here is an example of batch costing.
Example – Batch costing
Creamy Delights Limited is preparing the pricelist for its new flavor of ice cream, Crunchy Coconut. The management of Cream Delights Limited has estimated the following information for the production of a batch of 5,000 ice cream cones:
For 5,000 ice cones:
- Milk (1,000 liters @ $2 per liter)
- Artificial flavors (200 kg @ $5 per kg)
- Machine time (50 hours @ $10 per hour)
- Hired a supervisor ($300)
The following additional information is also given:
- Production overheads are to be absorbed based on 120% of the prime cost.
- Non-Production overheads are to be absorbed at the rate of $4 per machine hour.
- A profit mark-up of 30% is to be applied to the total cost to arrive at the selling price.
- Calculate the total cost and sales value of producing 5,000 and 10,000 ice creams.
- Calculate the per unit cost and selling price of each ice cream.
(Note: A single supervisor can be used for the production of 5,000 and 10,000 ice cream cones)