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CA Intermediate · Cost and Management Accounting · Unit & Batch Costing

In a batch costing system, the Economic Batch Quantity (EBQ) is the batch size at which the total of two costs is minimised. Which pair of costs is it?

EBQ is the batch size that minimises the sum of set-up cost per batch and the carrying cost of holding the units produced. Larger batches reduce set-up cost per unit but raise carrying cost, so the total is lowest at the economic batch quantity.

  1. ASet-up cost per batch and carrying cost of holding the units producedCorrect
  2. BDirect material cost and direct labour cost
  3. CPrime cost and factory overhead
  4. DSelling cost and distribution cost

Explanation

EBQ balances set-up cost, which falls per unit as batches get larger, against the carrying cost of inventory, which rises with batch size. The total of the two is lowest at EBQ. The other pairs do not vary inversely with batch size in this way.

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