CA Intermediate · Cost and Management Accounting

Unit & Batch Costing: formula sheet

Full chapter guide

Key formulas

Cost per unit: Cost per unit = Total cost ÷ Number of units produced; Use units produced for cost of production, and units sold for cost of sales per unit.
Prime cost: Prime cost = Direct materials + Direct labour + Direct expenses; Direct materials consumed = Opening stock + Purchases + Carriage inwards − Closing stock.
Factory cost: Factory cost = Prime cost + Factory overheads (adjusted for opening and closing WIP); Add opening WIP and deduct closing WIP at this stage. The sale value of normal scrap is credited to the relevant overhead (usually factory overheads) or deducted from the cost of production, as the question directs. Abnormal loss is shown outside the cost sheet at cost and written off to the Costing Profit and Loss Account.
Cost of production: Cost of production = Factory cost + Administration overheads (production-related); Adjust for opening and closing stock of finished goods to reach cost of goods sold.
Cost of sales: Cost of sales = Cost of goods sold + Selling and distribution overheads; Selling price = Cost of sales + Profit.
Selling price per unit: Selling price per unit = Total sales ÷ Units sold; If profit is given as a % of sales, profit = % × sales. If as a % of cost, profit = % × cost.
Total batch cost: Total batch cost = Direct materials + Direct labour + Direct expenses + Factory overheads + Administration and selling overheads (if the cost sheet extends to total cost); Include only the elements the question asks for. Prime cost and works cost are stages on the way.
Cost per unit of a batch: Cost per unit = Total batch cost ÷ Number of good units produced in the batch; If normal spoilage is absorbed, divide by good units. Use the question's treatment of losses.
Set-up cost per unit: Set-up cost per unit = Set-up cost per batch ÷ Batch size; This is why a larger batch reduces cost per unit.
Selling price per unit: Selling price per unit = Cost per unit + Profit per unit; If profit is given as a % on selling price, use cost = (100 − profit %) of price. If on cost, price = cost × (100 + profit %) ÷ 100.
Overhead absorption rate: Overhead rate = Budgeted overhead ÷ Budgeted base (labour hours, machine hours or direct wages); Overheads charged to a batch = rate × the batch's actual base.
Economic Batch Quantity: EBQ = √(2 × D × S ÷ C); D = annual demand (units), S = set-up cost per batch (₹), C = carrying cost per unit per year (₹).
Carrying cost per unit when given as a percentage: C = Cost per unit × carrying cost % per year; Use this when the question says carrying cost is, say, 10% of unit cost.
Number of batches per year: Number of batches = D ÷ EBQ; Round only if the question asks you to.
Total set-up cost: (D ÷ Q) × S; Q is the batch size.
Total carrying cost: (Q ÷ 2) × C; Average stock is half the batch size.
Total relevant cost: Set-up cost + Carrying cost; At EBQ the two parts are equal.

Quick revision

Unit costing suits a single uniform product, such as bricks, cement or coal.
The cost sheet runs from prime cost to gross factory cost to works cost to cost of production to cost of sales to profit.
Prime cost = direct material + direct labour + direct expenses.
Gross factory cost = prime cost + factory overheads. Works cost = gross factory cost + opening WIP − closing WIP. Deduct scrap or by-product realisable value where the question instructs.
Cost of production = works cost + office/administration overheads. The WIP adjustment is made in reaching works cost. The credit for scrap or by-product is deducted from the relevant cost (material or works cost) as the question instructs, so do not repeat it here. For losses: the cost of normal loss stays in the good units (net of scrap value), while abnormal loss is valued at cost and written off to Costing Profit & Loss.
Cost of goods sold = opening finished goods + cost of production − closing finished goods.
Cost of sales = cost of goods sold + selling and distribution overheads.
Cost per unit = total cost ÷ units produced (or sold, for cost of sales).
Batch costing treats each batch like a job and divides batch cost by units in the batch.
Set-up cost is spread over the units in a batch, so larger batches lower set-up cost per unit.
Simple EBQ = √(2DS ÷ C), with D annual demand, S set-up cost per batch, C carrying cost per unit per year. This is the form normally used in batch costing. It assumes constant demand and that each batch is received all at once.
If a question gives a production rate p and a demand rate d (same time unit, p greater than d), use EBQ = √(2DS ÷ (C × (1 − d ÷ p))). Stock builds up only gradually while production runs, so the adjusted form gives a larger batch than the simple form.
In the simple model, total set-up cost equals total carrying cost at EBQ, where carrying cost = C × Q ÷ 2. In the finite production rate model, carrying cost = C × Q × (1 − d ÷ p) ÷ 2, because average stock is Q × (1 − d ÷ p) ÷ 2, which is lower than Q ÷ 2. At EBQ this carrying cost equals total set-up cost (D ÷ Q) × S.
Number of batches per year = D ÷ EBQ.
Check that all costs and units use the same time period before dividing.

Common mistakes

Dividing total cost by units sold instead of units produced for cost of production. Fix: Use units produced for cost of production per unit. Use units sold only for cost of sales per unit.
Forgetting to adjust opening and closing WIP and finished goods stock. Fix: Adjust WIP at factory cost stage. Adjust finished goods at cost of goods sold stage.
Charging the full set-up cost to each unit instead of once per batch. Fix: Add set-up cost to the batch total, then divide the total by batch size.
Dividing total cost by units started instead of good units produced. Fix: Check for spoilage or defectives. Divide by good output after adjusting for scrap value and loss treatment as per the question.
Using monthly demand with an annual carrying cost. Fix: Convert everything to one period, usually a year, before using the formula.
Forgetting to convert carrying cost from a percentage into rupees per unit. Fix: Multiply the unit cost by the percentage first. For example, 10% of ₹50 gives C = ₹5.

Exam tips

Always draw the cost sheet with two columns: total (₹) and per unit (₹). Examiners award marks for layout and for each subtotal.
Show a working note for materials consumed, units in stock and any percentage calculation. Step marks come from these.
Read whether the question wants cost per unit on units produced or units sold. State your base in the answer line.
For theory, learn the features and the list of industries. A two-line contrast with job costing is a frequent short question.
In MCQs, check for items that must be excluded, such as interest and tax, before totalling.
Always present a batch cost sheet with a per-unit column. Examiners award marks for each element shown separately.
Read whether profit is on cost or on selling price before computing the price. This is a common trap in MCQs.
Set-up cost is a batch cost. Check if the question links it to Economic Batch Quantity, and if so, study that topic too.