Pinky Ltd. Produces product A in batches; management of Pinky Ltd. wants to know the number of batches of product A to be produced where the cost…

6(c) Economic batch quantity in Batch Costing Economic batch quantity in Batch Costing: In batch costing the most important problem is the determination of 'Economic Batch Quantity'. The determination of economic batch quantity involves two types of costs viz, (i) set up cost and (ii) carrying cost. With the increase in the batch size, there is an increase in the carrying cost but the set up cost per unit of product is reduced. This situation is reversed when the batch size is reduced. Thus there is one particular batch size for which both set up and carrying costs are minimum. This size of a batch is known as economic or optimum batch quantity. Economic batch quantity can be determined with the help of table, graph or mathematical formula. The mathematical formula usually used for its determination is as follows: E.B.Q = √(2DS / C) Where, D= Annual demand for the product S = Setting up cost per batch C = Carrying cost per unit of production per annum OR 6(c) Single and Multiple Overhead Rates Single overhead rate: It is one single overhead absorption rate for the whole factory. It may be computed as follows: Single overhead rate = Overhead costs for the entire factory / Total quantity of the base selected The base can be total output, total labour hours, total machine hours, etc. The single overhead rate may be applied in factories which produces only one major product on a continuous basis. It may also be used in factories where the work performed in each department is fairly uniform and standardized. Multiple overhead rate: It involves computation of separate rates for each production department, service department, cost center and each product for both fixed and variable overheads. It may be computed as follows: Multiple overhead rate = Overhead allocated/apportioned to each department/cost centre or product / Corresponding base Under multiple overheads rate, jobs or products are charged with varying amount of factory overheads depending on the type and number of departments through which they pass. However, the number of overheads rate which a firm may compute would depend upon two opposing factors viz. the degree of accuracy desired and the clerical cost involved.