What Is Costing?
Costing is the classifying, recording, and appropriate allocation of fixed and variable expenditure incurred for the determination of the costs of products or services, and a decision-making and forecasting tool.
Batch costing is a form of specific order costing. Job costing refers to the cost of jobs that are executed against specific orders whereas batch costing items are manufactured for stock. A finished product may require different components for assembly and may be manufactured in economical batch lots.
When orders are received from different customers, there are common products among orders; then production orders* may be issued for batches, consisting of a predetermined quantity** of each type of product.
*An order to produce a specified quantity of goods (same as PO).
**Economical Batch Quantity is a quantity calculated to reduce the cost of production.
The batch costing method is adopted in such cases to calculate the cost of each such batch. Cost per unit is ascertained by dividing the total cost of a batch by several items produced in that batch. To do that a Batch Cost Sheet is prepared.
Features Of Batch Costing:
- Batch Costing is a variation of Job costing:
In job costing total cost incurred on specific a job is ascertained whereas in Batch costing a batch is considered as a cost unit and to derive the cost of a particular unit of product total cost incurred to produce a batch is divided by the total number of units produced.
- Each batch is given a separate unique number and is Identified by the number of batches recorded on each unit of output of the batches:
A unit of the product is the output of which batch can be easily found by referring to the batch number recorded on the unit, e.g., the number of the batch in which a bottle of medicine has been produced is recorded on the bottle of medicine.
It is Beneficial where any goods produced having any defect may be called back from the market which is already sent to the market places.
- Unit Cost of batches varies with the size of the batches:
If the quantity produced in a batch is small, the unit cost of the product is more and if the quantity produced in a batch is large, the unit cost of the product of that batch is less. Therefore, it is necessary to find out the economic batch quantity by producing which the cost of production of a unit of the product can be kept to the minimum.
The setup cost usually is fixed in nature as with an increase in size the cost per unit decreases.
Advantages Of Batch Costing:
- The accounting work is considerably reduced as a group of homogeneous jobs constitutes a batch.
- The variations in the costs arising under job costing are smoothened using averaging such costs and spreading them over the batch of articles. This gives a consistent cost of production of every article in the batch.
- It gives the benefit of reduced cost of production arising out of Economic Batch Quantity (e., where both setup cost and carrying cost are minimum).
- Supervision becomes very easy and effective. So idle time is eliminated.
- The loss of time due to the inter-job transfer of materials, laborers, and tools is minimized under batch costing.
Batch costing is beneficial to the Following Industries:
Batch costing is generally used by industries that are in the production of an identical type of product or component in a large quantity at one time. The pharmaceutical industry, Garment industries, industries engaged in the manufacturing of FMCG, and the industries engaged in the production of components used in radio sets, television sets, watches, manufacture of bicycles, two-wheelers, automobiles, industries producing nuts, bolts, screws, etc.
Batch Costing Procedure:
The costing procedure for batch costing is similar to that of job costing. The only difference is that a batch becomes the cost unit rather than a job.
To cost, each batch (or group of identical products) is allotted a serial number (known as a batch number), just like a job number. The presentation of the various items of cost is made in the form of a statement known as a batch cost sheet.
The batch cost sheet includes the cost of any direct materials, direct labor, and direct expenses that can be directly identified with a particular batch. The share of overheads chargeable to the batch (calculated on some equitable basis) is also included.
The total cost of a batch, as shown in the batch cost sheet, divided by the total number of products in the batch yields the cost per product in the batch.
Economic Batch Quantity:
The optimum quantity for a batch is the quantity for which the setting up and carrying costs are minimum, such an optimum quantity is known as Economic Batch Quantity or Economic lot size.
Determination of the economic lot size is important in industries where batch costing is employed.
The need for determining economic lot size arises as:
(i) Every time a component/product is to be made, the setting up of the tool is involved. Because of this, some loss in production time will be there. Therefore, a maximum number of units are produced once the machine is set to reduce the cost per unit,
(ii) Such large production at one run will lead to accumulation of inventory and the costs related thereto,
(iii) Thus, there is a quantity for which the reduced cost of production is just offset by the costs of carrying the quantity inventory.
With an increase in lot size number of set up got reduced however same increased carrying cost was associated with the holding of excess inventory.
With a decrease in lot size or by reducing the batch size carrying cost will get reduced however it will result in increased setups and hence in both scenarios there is no reduction of cost.
However, at EBQ both Setup cost and carrying cost are minimum and hence at this level costs are reduced
The determination of the most economical batch quantity requires consideration of many related factors of costs and economies.
The factors that influence the decision in this respect are:
(i) Set up cost,
(ii) Manufacturing cost,
(iii) Interest on capital,
(iv) Storage cost, and
The formula to be used for the calculation of economic lot size is Q = √2US/C
Q = Qty. or units of products in the economic batch.
S = Set-up cost per batch
C = Carrying cost per unit of production p.a.
U = Annual units of production
U= Annual units of production can be estimated based on past trends and based on the expected demand in the future, one can also ascertain the quantity to be produced based on the PO received.
S = Set up cost is the cost incurred initially to set up the machinery for production.
C = Carrying cost is the opportunity cost, that is a return a company forgets because of the purchase of excess material. Rate of interest can be taken as considered in industry or FD rates as prevailing in the market to calculate carrying cost.
For Example: –
M/s Contrics Pharma Ltd, has an annual sales estimate of 10,00,000 XYZ Inj., costing 4 per/Unit the set-up cost per batch is Rs. 1,400, and the rate of interest is 7% as prevailing in the market.
C = per unit cost of material x rate of interest = 4 x7% = Rs 0.28/unit
EBQ can be calculated as follow,
EBQ = √2US/C
= √2 x 10,00,000 x 1400/0.28
= 1,00,000 Units/Per batch
Batch Costing in Tally Prime:
Maintaining stock items in batches will help in ensuring old stock is moving out first. Whether it is a perishable item, or items launched recently, batches help us to keep track of items and also identify which batch they belong to. You can configure your stock item master to allocate items to one or more batches. For better tracking, you can also provide the manufacturing or expiry date depending on the type of stock your business has.
While making a purchase entry, one can directly allocate the stock item into one or more batches depending on their business situations
Enable Batches in Tally Prime for your stock item: press F11 (Features) > set the option Enable Batches to Yes
If you do not see this option:
- Set Show more configurations to Yes
- One who dealing with perishable goods or where the date of expiry is a major concern like in pharma industries and other FMCG industries, can enable the option MaintainExpiry Dates for Batches in the F11 (Features)
This helps them to have a track of goods which are in or at the stage of expiry.
Configure Stock Items for Allocating Batches.
- Press Alt+G(Go To) > Create Master/Alter Master > type or select Stock Item and press Enter.
- Select Primary or an existing Stock Group in the Under
- Ensure that the Unit of Measurement is selected for the stock item.
- In the Stock Item Creation/Alteration screen, press F12 (Configure) > Maintain Stock Item in Batches to Yes.
If you need to use this option only for the current master, press Ctrl+I (More Details) > type or select Maintain in Batches > and press Enter
- In the Batches Setup screen, select the appropriate unit and set Maintain in Batches to Yes.
5.In the Stock Item Creation/Stock Item Alteration screen, set the option Maintain in batches to Yes.
6. Track date of manufacturing: Track date of manufacturing to Yes. This is required if you are dealing with perishable goods (which have both manufacturing and expiry dates) or stock items with limited shelf life (which have only manufacturing date and shelf-life period).
7. Use expiry dates to Yes: This is mostly required for perishable goods
- If stock items are stored in batches or lots, it is convenient to choose stock items based on business sales policy. Whether stock items have been segregated based on their manufacturing and expiry dates or based on different rates for a stock item, when passing a sales entry, one can choose to sell items from the batch as they need.
If you have purchased 100 Pcs of Item A, that has an expiry date of 30-April-2019 and 200 more pcs of the same item with an expiry date of 31-Jul-2019. As you make a transaction entry for the purchased quantity of Item A, you can allocate the 100 Pcs to Batch 1 and the other 200 Pcs to Batch 2. Similarly, when you sell Item A to your parties, you can choose to sell Item A from Batch 1 – with an earlier expiry date, that is 20-April-2019.
Batch wise entries in Tally:
To pass Purchase Entry in Tally:
While passing purchase entry in tally, tally provides different fields which helps in maintaining the inventory data in a systematic manner.
Steps to maintain inventory data in Batches.
- Gateway of Tally > Vouchers > Press F9 > Purchase Voucher
- Enter the Purchase details
- Select the inventory item
In the stock item allocation window Tally provides various fields to record inventory in a systematic manner, details of Products produced or purchased or having different manufacturing dates and expiry dates can be easily maintained and can be traced with this feature of batch costing feature in tally.
To pass Sales Entry in Tally:
Steps to pass sales entry and outward movement of inventory in Batches.
- Gateway of Tally > Vouchers > Press F8 > Sales Voucher
- Enter the Sales details
- Select the inventory item
In the stock allocation window, Tally showed us the details of the batch such as manufacturing date, expiry date, and different rates if any. With the help of this information, one can select the batch of a product as per the rate/manufacturing date of the product.
For Eg: a Batch having an expiry date prior to others can be sold out first.
Batch Summary and Report
A batch Summary is a summary of all the batches of a particular Stock Item for the given period. One can select the required batch and further drill down to view the Batch Monthly Summary and then further to the Batch Voucher Report of the selected batch of an item.
To view the Batch Summary
- Gateway of Tally> Display More Reports> Inventory Books > Batch.
Alternatively, press Alt+G (Go To) > type or select Batch Voucher > and press Enter.
- Select the required Name of Item and select the Name ofBatch from the List of Batches.
The Batch Voucher report appears as shown
3.Press F8(Batch-wise), and the Batch Summary of the selected item appears
- Select the required batch and press Enter to view the Item Batch Monthly Summaryas shown below:
Configure Batch Summary:
One can easily extract the batch summary report based on their specification by using the required parameters given below:
Press F12 configurations in Batch Summary Report.
Show Quantity: Set this option to Yes to view the report with quantity for all transactions.
Show Rate: Set this option to Yes to view the report with the rate for all transactions
Show Value: Set this option to Yes to view the report with value for all transactions.
Show Opening Balance: Set this option to Yes to display the Opening balance in the report.
Show Goods Inwards: Set this option to Yes to display all Inward details, like inward quantities, inward rate, and inward value.
Show Goods Outwards: Set this option to Yes to display all Outward details, like outward quantities, outward rate, and outward value
Show Closing Balance: Set this option to Yes, to display closing quantity, rate, and value
Show Manufacturing Date: By default, this option is set to No. Set this option to Yes to view the Manufacturing date(s) of the batch(es) of a selected stock item.
Show Expiry Date of Batches: By default, this option is set to No. Set this option to Yes to view the Expiry date(s) of the batch(es) of a selected stock item.
Show Number of days for Expiry: By default, this option is set to No. Set this option to Yes to view the number of days to expire against each batch for a selected stock item.
Show Stock Items with Zero Quantity or Balance: By default, this option is set to No. Set this option to Yes to view only the expired batches