# Batch Costing

Batch Costing is used when articles are produced in lots / batches (e.g., 500 units made in one production run) rather than as one-off jobs. Each batch is a separate cost unit; cost per unit = total batch cost ÷ number of good units in the batch.

It is widely used in pharmaceuticals, biscuits, garments and any industry producing identical items in groups.

## Economic Batch Quantity (EBQ)

EBQ is the batch size that minimises total cost per batch by balancing two opposing costs:

Set-up cost – fixed per batch (machine setting, design changes). The larger the batch, the lower set-up cost per unit.
Carrying cost – variable per unit per annum (storage, insurance, capital tied up). The larger the batch, the higher the average inventory and carrying cost.

## Formula

$$EBQ = \sqrt{\dfrac{2 \times D \times S}{C}}$$

Where:

D = Annual demand of the product (units)
S = Set-up cost per batch (₹)
C = Carrying cost per unit per annum (₹)

This is structurally identical to the EOQ formula in Inventory Management – set-up cost replaces ordering cost, and carrying cost is on inventory of finished output rather than raw material.

## Related quantities

Number of batches per year = D ÷ EBQ
Total set-up cost p.a. = (D / EBQ) × S
Total carrying cost p.a. = (EBQ / 2) × C
At EBQ, Set-up cost p.a. = Carrying cost p.a. (the two curves intersect).

Worked example

### Example 1

Example – EBQ Calculation

Annual demand D = 24,000 units; set-up cost per batch S = ₹120; carrying cost per unit per annum C = ₹4.

$$EBQ = \sqrt{\frac{2 \times 24{,}000 \times 120}{4}} = \sqrt{14{,}40{,}000} = 1{,}200 \text{ units}$$

Number of batches per year = 24,000 / 1,200 = 20 batches
Total set-up cost p.a. = 20 × ₹120 = ₹2,400
Total carrying cost p.a. = (1,200 / 2) × ₹4 = ₹2,400 ✔ (equal – confirms EBQ)

⚠️ Common exam mistakes

Using annual set-up cost in place of cost per batch in the formula – S must be per set-up.
Using carrying cost per unit per month instead of per annum – keep D and C on the same time base (usually annual).
Forgetting that EBQ minimises total cost (set-up + carrying), not just one component – it is not the batch size that gives the smallest set-up cost.
Confusing EBQ (a production-batch concept) with EOQ (a purchase-order concept), though the formula is identical.

Reference:

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Batch Costing and Economic Batch Quantity (EBQ)

Worked example

⚠️ Common exam mistakes