# Batch Costing and Economic Batch Quantity (EBQ)

## Batch Costing — Definition

A form of specific order costing where each batch (group of identical units produced together) is treated as a single cost unit. A separate Batch Cost Sheet is prepared per batch.

Examples: Readymade garments, pharmaceuticals, biscuits, electronic components.

---

## Economic Batch Quantity (EBQ)

### Concept

EBQ is the batch size that minimises the combined total of set-up/processing costs and inventory carrying costs.

### The Cost Trade-off

Cost	Relationship with Batch Size	Logic
Set-up & Processing Cost	Inverse ↓	Larger batch = fewer batches per year = fewer set-ups
Carrying Cost	Positive ↑	Larger batch = more units held in inventory at any time

The optimal batch size is the point where the total of these two costs is minimised — exactly analogous to EOQ in purchasing.

### Formula

$$EBQ = \sqrt{\frac{2 \times \text{Annual Demand} \times \text{Set-up Cost per Batch}}{\text{Carrying Cost per unit per annum}}}$$

---

## EBQ vs EOQ — Side by Side

Feature	EOQ (Purchasing)	EBQ (Production)
Optimises	Order quantity	Batch size
Cost 1	Ordering cost	Set-up cost
Cost 2	Carrying cost	Carrying cost
Formula structure	Same	Same

---

## Deriving Number of Batches

$$\text{Number of batches per year} = \frac{\text{Annual Demand}}{EBQ}$$

Worked example

### Example 1

Annual demand for Product ZZ = 12,000 units. Set-up cost per batch = ₹500. Carrying cost per unit per annum = ₹2.

$$EBQ = \sqrt{\frac{2 \times 12{,}000 \times 500}{2}} = \sqrt{6{,}000{,}000} \approx 2{,}449 \text{ units}$$

Number of batches per year = 12,000 ÷ 2,449 ≈ 5 batches.

At this batch size, total set-up cost + total carrying cost is at its minimum.

### Example 2

Verify the EBQ formula logic: if batch size is only 1,000 units, we need 12 set-ups (₹6,000 set-up cost) but carry less inventory. If batch size is 6,000 units, we need only 2 set-ups (₹1,000) but carry far more inventory (high carrying cost). EBQ of ~2,449 units finds the balance point.

⚠️ Common exam mistakes

Confusing EBQ with EOQ — both use the same formula structure, but EBQ is for production batch sizing (set-up cost) while EOQ is for purchase ordering (ordering cost)
Reversing the cost relationships — larger batch REDUCES set-up cost but INCREASES carrying cost
Using total annual carrying cost instead of carrying cost per unit per annum in the denominator
Forgetting to calculate number of batches per year after finding EBQ — exam questions often ask for both

Reference:

Now that you've read this — what's next?

Move from understanding → mastery in 3 clicks. Each option below picks up from this lesson's topic.

🔥 Drill 5 Qs on this → ✍️ Adaptive practice →