Think of a pharmaceutical company producing 10,000 Paracetamol tablets in one production run. Costing each tablet individually is impractical — instead, the entire production run is treated as one cost unit, called a batch. The total cost is computed, then divided by units produced to get cost per unit. That is Batch Costing in a nutshell.
Batch Costing is a variant of Job Costing, used when a group of identical units is manufactured together. Unlike Job Costing (where each job is unique), every unit in a batch is identical — same design, same material, same process. The batch is the cost unit. Direct materials, direct labour, and overheads are accumulated for the entire batch, then divided by quantity to find unit cost. You will see this in pharmaceuticals, garment factories (e.g., 500 shirts of the same size), printing presses, bakeries, and electronics assembly.
The most exam-critical concept here is Economic Batch Quantity (EBQ) — the optimal batch size that minimises the sum of setup costs (cost of preparing machines or moulds per batch) and carrying costs (cost of holding finished inventory between batches). The formula is:
EBQ = √(2DS / C)
where D = annual demand (units), S = setup cost per batch (₹), and C = carrying cost per unit per annum (₹). Larger batches reduce setup cost but inflate carrying cost; smaller batches do the opposite. EBQ finds the sweet spot.
When production is gradual — that is, production rate P > demand rate D — a modified formula applies:
EBQ = √(2DS / C × P / (P − D))
This version appears in 6-mark and 8-mark questions and must be treated as compulsory, not optional.
Finally, scrap and defectives within a batch raise unit cost. If 100 of 2,000 units are rejected, the full batch cost is recovered from only 1,900 good units. Always check whether the question asks for cost per batch or cost per good unit.