Question

How do you work out the formula for optimal batches?

Answer 1

In Batch Costing articles are produced in a a lot, i.e., instead of producing one unit of product a lot of say, 100 or 200 units of such product is produced. The most important area in the batch costing is the determination of optimum batch size to be produced or how much units to be produced in a lot.

The determination of economic batch quantity involves two types of costs:-

1. Set up Cost, and
2. Carrying Cost.

With the increase in the batch size, the carrying cost will also increase but the set up cost per unit of products is reduced and vice versa. There there is one batch size for which both set up and carrying costs are minumum. This size is know as Economic Batch Quantity (EBQ) or Optimal Batch size.

Optimal Batch size can be determined with the help of a table, graph or mathematical formula. The mathematical forumula usually used for iter determination is as as follow:-

Where,

D = Annual Demand for the Product

S = Setting up Cost per Batch

C = Carrying Cost per unit of Production.

Consider the below example for how optimal batch size is calculated