Cost and Management Accounting · Job Costing

Batch Costing and Economic Batch Quantity (EBQ) for CA Intermediate

Updated 4 October 2026 · Fact-checked

Batch costing finds the cost of a group of identical units made together as one batch. Cost per unit equals total batch cost divided by units in the batch. Economic batch quantity (EBQ) is the batch size with the lowest total of set-up and carrying costs: EBQ = √(2DS ÷ C), adjusted for production rate if needed.

Understand Batch Costing and Economic Batch Quantity

Batch costing is a form of job costing. Instead of one job for one customer, you make a batch of identical units. The batch is the cost unit. You collect material, labour and overheads for the whole batch, then divide by the number of good units to get cost per unit.

It is used where products are made in lots: garments, footwear, medicines, spare parts, toys, electronic components and bakery items. The main difference from job costing is this: in job costing each job is usually unique and made to a customer's order. In batch costing, many identical units are made together, often for stock.

Every batch has a set-up cost. This is the cost of preparing machines, tooling, changing dies and first-piece testing. It is incurred once per batch, whatever the batch size. So big batches mean fewer set-ups and lower total set-up cost.

But big batches create more stock. Stock has a carrying cost: interest on money locked up, storage, insurance, obsolescence. Total carrying cost rises with batch size. The two costs pull in opposite directions.

The economic batch quantity (EBQ) is the batch size where total set-up cost plus carrying cost is the lowest. At EBQ, annual set-up cost equals annual carrying cost. In the gradual-production model, the carrying cost is measured on average stock of (Q ÷ 2) × (1 − d ÷ p), not Q ÷ 2. The logic is the same as Economic Order Quantity, but you are deciding how much to produce, not how much to buy.

Key rules to remember

Cost per unit of a batch: Cost per unit = Total batch cost ÷ Number of good units in the batch; Total batch cost = material + labour + direct expenses + overheads, including the set-up cost of that batch.
Number of batches: Number of batches per year = Annual demand (D) ÷ Batch size (Q); Annual set-up cost = number of batches × set-up cost per batch.
EBQ (simple form): EBQ = √(2 × D × S ÷ C); D = annual demand, S = set-up cost per batch, C = carrying cost per unit per year. Use when production is treated as instantaneous.
EBQ (with production and demand rates): EBQ = √[(2DS ÷ C) × (p ÷ (p − d))]; p = daily production rate, d = daily demand rate, p > d. Use when units are added to stock gradually while being sold. Here C is the carrying cost per unit per year. The ratio p ÷ (p − d) has no units, so daily rates are fine.
Total relevant cost at a batch size (simple form): Total cost = (D ÷ Q) × S + (Q ÷ 2) × C; This applies to the simple form, where average stock is Q ÷ 2. At EBQ, the two parts are equal.
Total relevant cost at a batch size (gradual production): Total cost = (D ÷ Q) × S + (Q ÷ 2) × (1 − d ÷ p) × C; In the gradual-production model, average stock is (Q ÷ 2) × (1 − d ÷ p), so the carrying cost term is smaller than (Q ÷ 2) × C. Using (Q ÷ 2) × C here overstates carrying cost. At the EBQ from the adjusted formula, set-up cost equals carrying cost under this expression.
Carrying cost when given as a percentage: C = Cost per unit × carrying cost percentage; Convert the percentage into rupees per unit per year before using the formula.

How to solve Batch Costing and Economic Batch Quantity questions

Use this method for any batch costing or EBQ question. Write each step so the examiner can award step marks.

1Read the question and decide what is asked: cost per unit of a batch, EBQ, number of batches, or total cost at a given batch size.
2List the data: annual demand, set-up cost per batch, carrying cost per unit per year, production and demand rates if given.
3Check units. Make sure demand and carrying cost are both annual. Convert a carrying cost percentage into rupees per unit.
4For batch cost, prepare a batch cost statement: materials, labour, direct expenses, prime cost, overheads, set-up cost, total cost. Divide by good units.
5For EBQ, choose the right formula. If production rate and demand rate are given, use the adjusted form. Show the substitution.
6Compute the number of batches (D ÷ EBQ) and the total set-up and carrying costs. Check that they are equal at EBQ. For the simple form, carrying cost = (Q ÷ 2) × C. For the gradual-production form, carrying cost = (Q ÷ 2) × (1 − d ÷ p) × C.
7If asked, compute cost per unit at EBQ or compare with another batch size using total cost. Use the total cost expression that matches the model in the question.
8State the final answer clearly with units and rupees.

Quickest way: Fast EBQ approach under time pressure

When to use it: Use for MCQs and for the first part of a written EBQ question, when only the EBQ or number of batches is needed.

Underline D, S and C. Make C annual and per unit.
Compute 2 × D × S first, divide by C, then take the square root. If p and d are given, multiply the value inside the root by p ÷ (p − d).
In MCQs on the simple form, test the options: at the correct EBQ, (D ÷ Q) × S equals (Q ÷ 2) × C. Substitute an option to confirm. For the gradual-production form, the check is (D ÷ Q) × S = (Q ÷ 2) × (1 − d ÷ p) × C.
Estimate the root using nearby perfect squares to eliminate options quickly.
In written answers, always show the formula, the substitution and the result. Then add a small table of set-up cost, carrying cost and total cost if comparison is asked.
Keep batch cost statements in a fixed order: material, labour, direct expenses, overheads, set-up, total, units, per unit.

Common mistakes in Batch Costing and Economic Batch Quantity

Using monthly demand or a monthly carrying cost with annual figures.
The question mixes time periods and students plug numbers in directly.
Fix: Convert D and C to the same period, normally a year, before using the formula.
Forgetting to convert the carrying cost percentage into rupees per unit.
The question gives, say, 10% of cost, and students put 10 or 0.10 in place of C.
Fix: Compute C = unit cost × percentage first. Then use C in the formula.
Dividing the batch cost by units started instead of good units.
Students ignore spoilage or rejects in the batch.
Fix: Read the question for rejects. Divide by good output, so the cost of normal spoilage is borne by the good units.
Using the simple EBQ formula when production and demand rates are given.
Students remember √(2DS ÷ C) and stop reading.
Fix: If daily production p and daily demand d are given, use EBQ = √[(2DS ÷ C) × (p ÷ (p − d))]. Multiply the simple result inside the root by p ÷ (p − d).
Leaving the set-up cost out of the batch cost, or charging it per unit of annual demand.
Set-up cost is treated as a general overhead.
Fix: Set-up cost is per batch. Add it once to that batch cost, then divide by the batch units.
Confusing batch costing with job costing in theory answers.
Both use job cost sheets and the terms sound similar.
Fix: Remember: job is usually unique and customer-specific; batch is a group of identical units, often made for stock, and the batch is the cost unit.

Worked examples

Example 1

A company makes a component. Annual demand is 12,000 units. Set-up cost per batch is ₹300. Carrying cost is ₹4 per unit per year. Find the EBQ, the number of batches per year, and the total annual set-up and carrying cost at EBQ.

Show the solution

D = 12,000; S = ₹300; C = ₹4.
EBQ = √(2 × 12,000 × 300 ÷ 4).
2 × 12,000 × 300 = 72,00,000. Divided by 4 = 18,00,000.
√18,00,000 = 1,341.64, so about 1,342 units.
Number of batches = 12,000 ÷ 1,341.64 = 8.94, about 9 batches.
Annual set-up cost = 8.94 × 300 = ₹2,683 (approx.).
Annual carrying cost = (1,341.64 ÷ 2) × 4 = ₹2,683 (approx.), equal to set-up cost as expected.
Total = ₹5,367 (approx.).

Answer: EBQ is about 1,342 units, about 9 batches a year, and total set-up plus carrying cost is about ₹5,367.

Example 2

A batch of 500 units is produced. Material cost is ₹60,000, direct wages ₹40,000, and direct expenses ₹5,000. Set-up cost for the batch is ₹7,500. Factory overheads are absorbed at 50% of direct wages. 20 units are rejected in the batch and have no value. Treat the rejection as normal, so the cost of the 20 rejected units is borne by the good units. Find the cost per good unit.

Show the solution

Prime cost = 60,000 + 40,000 + 5,000 = ₹1,05,000.
Factory overheads = 50% × 40,000 = ₹20,000.
Set-up cost = ₹7,500.
Total batch cost = 1,05,000 + 20,000 + 7,500 = ₹1,32,500.
Good units = 500 − 20 = 480.
Because the rejects are normal and have no value, the whole batch cost of ₹1,32,500 is borne by the 480 good units.
Cost per good unit = 1,32,500 ÷ 480 = ₹276.04 (approx.).

Answer: Total batch cost is ₹1,32,500 and cost per good unit is about ₹276.04.

Exam tips

In theory questions on difference between job and batch costing, write at least three points: nature of cost unit, identical versus unique units, and order basis versus stock production.
In EBQ numericals, write the formula first, then the substitution. This secures step marks even if arithmetic slips.
Look for a cue word such as 'production rate' or 'per day'. It signals the adjusted EBQ formula, and also the adjusted carrying cost of (Q ÷ 2) × (1 − d ÷ p) × C.
If asked to compare two batch sizes, prepare a short table of set-up cost, carrying cost and total cost for each size, then pick the lowest. Use the carrying cost expression that matches the model.
In MCQs, confirm your EBQ by checking that annual set-up cost equals annual carrying cost, using the carrying cost expression of the right model. It takes seconds.

Practice questions from Job Costing

Batch Costing and Economic Batch Quantity in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Batch Costing and Economic Batch Quantity: frequently asked questions

What is the difference between job costing and batch costing?

Job costing tracks the cost of one specific job, usually a customer's unique order. Batch costing tracks the cost of a group of identical units made together, and the batch is the cost unit. Cost per unit in batch costing is total batch cost divided by good units.

What is the EBQ formula?

The simple formula is EBQ = √(2DS ÷ C), where D is annual demand, S is set-up cost per batch and C is carrying cost per unit per year. If production and demand rates are given, use EBQ = √[(2DS ÷ C) × (p ÷ (p − d))].

Why are set-up cost and carrying cost equal at EBQ?

Set-up cost falls as batch size rises, while carrying cost rises. The total is lowest where the two lines meet. In the simple model, this happens when (D ÷ Q) × S equals (Q ÷ 2) × C. In the gradual-production model, average stock is (Q ÷ 2) × (1 − d ÷ p), so total cost is (D ÷ Q) × S + (Q ÷ 2) × (1 − d ÷ p) × C, and set-up cost equals this carrying cost at EBQ.

Is EBQ the same as EOQ?

The logic is the same, but the use is different. EOQ decides how much to purchase per order, using ordering cost. EBQ decides how much to produce per batch, using set-up cost.