Batch costing is a form of specific order costing. Job costing refers to costing of jobs that are executed against specific order where as in 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 order may be issued for batches, consisting of a predetermined quantity of each type of product. 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 number of items produced in that batch.
Determination of the economic lot size is important in industries where batch costing is employed. The need for determining economic lot size arises:
Every time a component or product is to be made, setting up of the tool is involved. Because of this some loss in production time will be there. Therefore, maximum numbers of units are produced once the machine is set in order to reduce the cost per unit. such large production at one run will lead to accumulation of inventory and the costs related thereto. thus there is a quantity for which reduced cost of production is just offset by costs of carrying the quantity inventory.
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