Cost Accounting · Job Costing

Batch Costing and Economic Batch Quantity (EBQ)

Updated 10 October 2026 · Fact-checked

Batch costing finds the cost of a group of identical units produced together, then divides by batch size for unit cost. Economic batch quantity is the batch size that minimises total set-up and carrying cost: EBQ = √(2DS ÷ C). Compute it, then check batches and total cost.

Understand Batch Costing and Economic Batch Quantity

Batch costing is a form of job costing. In job costing, one customer order is one job. In batch costing, a group of identical units is made together and treated as one job. The group is the batch. You collect material, labour and overheads against the batch number, then divide by the units in the batch to get cost per unit.

The difference from job costing is the cost object. A job is usually unique and made to a customer's specification. A batch is a lot of similar units, often made for stock or for several orders. Examples: a pharma company making a lot of tablets, a garment maker cutting 500 shirts of one design, or a workshop producing a lot of components.

Some costs are incurred once per batch, whatever its size. Machine set-up, tool change and first-piece inspection are examples. Spread over more units, they cost less per unit. So bigger batches look cheaper on set-up cost.

But bigger batches mean more units sitting in stock. That adds carrying cost: interest on money tied up, storage, insurance and obsolescence. The economic batch quantity (EBQ) is the batch size where total set-up cost plus carrying cost for the year is lowest. It is the same logic as EOQ, except the set-up cost replaces the ordering cost, because you are making the units rather than buying them.

At the EBQ, the annual set-up cost equals the annual carrying cost. This gives you a quick check on your answer.

Key rules to remember

Economic batch quantity (basic): EBQ = √(2 × D × S ÷ C); D = annual demand in units, S = set-up cost per batch, C = carrying cost per unit per year. Use the basic formula when the whole batch is assumed to arrive in stock at once or no production and usage rates are given; use the rate version when they are given.
EBQ with production and usage rates: EBQ = √[2 × D × S ÷ (C × (1 − d ÷ p))]; Use only when the question gives a daily production rate p and a daily usage or demand rate d, with p greater than d. Both rates must be in the same time unit.
Number of batches per year: Batches = D ÷ EBQ; Gives the number of set-ups in the year.
Annual set-up cost: Set-up cost = (D ÷ Q) × S; Q is the batch size.
Annual carrying cost: Carrying cost = (Q ÷ 2) × C; Uses average stock of half the batch size in the basic model.
Cost per unit of a batch: Cost per unit = Total batch cost ÷ Units in the batch; Use good units if the question says some units are spoiled or rejected and asks for cost per good unit.

How to solve Batch Costing and Economic Batch Quantity questions

Use this method for any question on batch costing or EBQ.

1Read the question and decide what is asked: a batch cost sheet, the EBQ, the total cost at a given batch size, or a price.
2List the data with labels: D, S, C, batch size, units produced and any rates. Check that the units match, for example C per unit per year and D per year.
3For EBQ, put the values into √(2DS ÷ C). Compute 2DS first, divide by C, then take the square root. Use the production-rate version only if the question gives p and d.
4Find the number of batches, D ÷ EBQ. Then compute annual set-up cost and annual carrying cost. They should be equal at the EBQ.
5For a batch cost sheet, list material, labour and direct expenses to get prime cost. Add factory overheads, then set-up cost if it is charged to the batch, to reach works cost. Add administration and other overheads for total cost.
6Divide total batch cost by the number of units for cost per unit. Add profit if a price is needed, noting whether profit is on cost or on selling price.
7If asked to compare batch sizes, compute total cost for each size and choose the lowest. State the conclusion in one line.

Quickest way: Square-root shortcut with a check

When to use it: Use it for MCQs and for the first part of any EBQ numerical, when only the batch size or the minimum cost is wanted.

Write 2 × D × S first and divide by C. Cancel zeros before calculating.
Take the square root. If the number is not a perfect square, check whether the options are close approximations.
Check by testing whether D ÷ EBQ × S equals EBQ ÷ 2 × C. If they match, the answer is right.
For minimum total cost, remember that it equals twice the set-up cost at EBQ, so you only compute one half and double it.

Common mistakes in Batch Costing and Economic Batch Quantity

Using the monthly carrying cost or monthly demand with an annual figure.
The question gives data in mixed periods and students plug in numbers without reading units.
Fix: Convert D and C to the same year basis before using the formula.
Forgetting the 2 inside the square root, or dividing by 2 as in the average stock.
Students mix up the EBQ formula with the carrying cost formula (Q ÷ 2) × C.
Fix: Write EBQ = √(2DS ÷ C) as a fixed line. Use Q ÷ 2 only for average stock.
Treating set-up cost as a per-unit cost.
The word 'cost' suggests per unit, but set-up cost is incurred once per batch.
Fix: Check the data label. If it says per batch or per set-up, multiply by the number of batches.
Dividing the batch cost by units started instead of the units the question asks for.
Rejected or spoiled units are ignored.
Fix: Read whether cost per unit is for units produced or good units. Divide by the units the question names.
Mixing up job costing and batch costing in a difference question.
Both use a cost sheet, so students write the same points for each.
Fix: Write the cost object: a job is a single customer order, usually unique. A batch is a lot of identical units. Add one point on unit cost and one on set-up.
Applying the production-rate formula when no rates are given, or the basic formula when they are.
Students memorise one version only.
Fix: Scan the question for daily production and usage rates before choosing the formula.

Worked examples

Example 1

A company makes a component with annual demand of 25,000 units. Set-up cost is ₹200 per batch. Carrying cost is ₹10 per unit per year. (a) Find the EBQ and the number of batches in a year. (b) Show that a batch size of 2,000 units costs more in total than the EBQ.

Show the solution

Data: D = 25,000, S = ₹200, C = ₹10.
EBQ = √(2 × 25,000 × 200 ÷ 10) = √(10,000,000 ÷ 10) = √1,000,000 = 1,000 units.
Batches per year = 25,000 ÷ 1,000 = 25.
At 1,000 units: set-up cost = 25 × ₹200 = ₹5,000. Carrying cost = (1,000 ÷ 2) × ₹10 = ₹5,000. Total = ₹10,000.
At 2,000 units: batches = 25,000 ÷ 2,000 = 12.5. Set-up cost = 12.5 × ₹200 = ₹2,500. Carrying cost = (2,000 ÷ 2) × ₹10 = ₹10,000. Total = ₹12,500.
₹12,500 is more than ₹10,000, so 2,000 units is not economic.

Answer: EBQ = 1,000 units, with 25 batches a year and a minimum total cost of ₹10,000. A batch of 2,000 units costs ₹12,500, which is ₹2,500 more.

Example 2

A batch of 500 units of a product has these costs: direct materials ₹60,000, direct wages ₹40,000, direct expenses ₹5,000, and set-up cost ₹6,000 for the batch. Factory overheads are absorbed at 80% of direct wages. Administration overheads are 10% of works cost. Prepare the batch cost sheet, find cost per unit, and find the selling price per unit if profit is 20% on selling price.

Show the solution

Prime cost = 60,000 + 40,000 + 5,000 = ₹1,05,000.
Factory overheads = 80% × 40,000 = ₹32,000.
Works cost = 1,05,000 + 32,000 + 6,000 set-up = ₹1,43,000.
Administration overheads = 10% × 1,43,000 = ₹14,300.
Total cost of the batch = 1,43,000 + 14,300 = ₹1,57,300.
Cost per unit = 1,57,300 ÷ 500 = ₹314.60.
Profit is 20% on selling price, so cost is 80% of price. Selling price of batch = 1,57,300 ÷ 0.80 = ₹1,96,625. Profit = ₹39,325.
Selling price per unit = 1,96,625 ÷ 500 = ₹393.25.

Answer: Total batch cost is ₹1,57,300 and cost per unit is ₹314.60. Selling price is ₹393.25 per unit, which is ₹1,96,625 for the batch.

Exam tips

In MCQs, read whether the data is annual and per unit. Most wrong options come from a unit mismatch.
In written answers, show the formula, the substitution and the final unit (units, batches or ₹). Step marks are given for each.
Do the check: set-up cost equals carrying cost at the EBQ. It takes ten seconds and catches errors.
For a difference question, write a short two-column comparison on the cost object, nature of output, set-up cost and unit cost.
If a batch cost sheet has set-up cost, treat it as a batch cost and state where you included it. Keep the same treatment throughout the answer.

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.

CA IntermediateBatch Costing and Economic Batch Quantity

Batch Costing and Economic Batch Quantity: frequently asked questions

What is batch costing in simple words?

It is a method where the cost is collected for a lot of identical units made together. You then divide the total by the number of units to get cost per unit. It is an extension of job costing.

What is the difference between job costing and batch costing?

In job costing, each job is usually a unique order for one customer, and its cost is found separately. In batch costing, a group of identical units forms the cost object, and cost per unit is the batch cost divided by batch size. Batch costing also brings in set-up cost per batch and the choice of an economic batch size.

How do you calculate EBQ in batch costing?

Use EBQ = √(2DS ÷ C), where D is annual demand, S is set-up cost per batch and C is carrying cost per unit per year. Then divide D by EBQ to get the number of batches. If production and usage rates are given, use the version with (1 − d ÷ p) in the denominator.

How is EBQ different from EOQ?

EOQ is for items you buy, so the cost balanced against carrying cost is the ordering cost. EBQ is for items you make, so the cost balanced against carrying cost is the set-up cost per batch. The formula has the same form.