Batch Costing Example: What One Batch Really Cost

Batch costing treats a batch as the unit you cost: add up the materials, labor and overhead that went into it, then divide by the good units that came out. The formula is total batch cost ÷ good units = cost per unit. Done before the batch, from the recipe, it gives you a standard cost. Done after, from what really happened, it gives you the actual cost, and the gap between the two tells you where the money went. Below is one batch of kūlolo costed both ways.

The short version

• Batch cost = materials + packaging + labor + overhead. Cost per unit = batch cost ÷ good units.
• Standard cost uses the recipe, the prices you expect and the yield you plan for.
• Actual cost uses the lots you really used, at what you really paid, and the units you could really sell.
• Break the difference into price, labor and yield. Yield is usually the biggest, and the least watched.
• TaroStack works out actual cost for every batch as it's recorded. The section on it is further down.

What batch costing is, and who it suits

It suits anyone who makes identical things in runs: a bakery's 48 loaves, a soap maker's loaf of 20 bars, a hot sauce kitchen's 200 bottles. Costing each bottle one at a time would be silly. Costing the run and dividing is accurate and quick.

Job costing is the same idea for one-off work, where every order is different: a wedding cake, a custom label run. Batch costing is job costing where the job happens to be a batch of identical units.

The batch: kūlolo, four pans

This is Windward Roots, the made-up taro business I use in these examples. Kūlolo is a steamed taro and coconut pudding. A pan makes 12 packs, and a day's batch is four pans, so the plan is 48 packs. The costs come from the same kitchen's inventory template with recipes.

Standard cost: what the recipe says

Brown sugar is 4,000 g, or 8.82 lb, at $1.10 a pound. Overhead is the kitchen rent, gas and insurance spread across the packs the kitchen makes in a month, which came to about 50 cents a pack. Labor is the hands-on time: grating, mixing, filling pans and packing, not the hours it steams on its own. If working out overhead and labor per unit is new, the method is in the steps in recipe costing and how to compute labor cost in baking.

Actual cost: what really happened

On the day, three things went differently:

1. The taro came from a lot that cost $3.40/kg, not $2.90. It was a short month for taro.
2. The first 10 cans of coconut milk came from the old case at $2.25, and the last 6 from a new case at $2.45.
3. Half of one pan cracked coming out, so 6 packs weren't sellable. The batch made 42 good packs, not 48.

And it took three and a half hours, not three.

Overhead stays at $24 because the batch used the same day of rent and gas whatever came out of the oven.

Where the 90 cents went

Each pack cost $4.57 instead of $3.67, 90 cents more, or about 25%. Here's where it came from:

The taro price is the one everyone would have noticed, because it's on an invoice. It isn't the big one. The half pan that cracked cost more than the taro price rise, the extra labor and the coconut milk put together, and it doesn't show up on any invoice at all. It only shows up if somebody divides by 42.

If the grocery pays $6.00 a pack, the recipe says the margin is 39%. This batch made 24%. One batch like that is bad luck. One a week is a pricing problem, and it's worth knowing which: how to price baked goods starts from the cost you actually get, not the one on paper.

Doing it on paper or in a spreadsheet

The formula doesn't change:

Cost per good unit = (materials + packaging + labor + overhead) ÷ good units

For the actual cost you need three things written down on the day: which lot of each ingredient you used (so you can find its price), how many hours it took, and how many good units came out. A batch sheet with those three lines is enough. The trouble is finding the price afterwards. If the taro lot's invoice is in a folder and the coconut milk came from two cases, costing one batch takes twenty minutes, which is why most people only ever look at standard.

Costing every batch isn't necessary. Costing one batch of each product a month, picked at random, catches most of what matters, and the yield number tells you whether to look more often.

Where this stops working

It stops when it stops getting done. Standard cost gets worked out once, when the product is priced, and then it's the number everyone believes for years. Actual cost needs the lot prices, the hours and the yield for each batch, every time, and in a busy week nobody has twenty minutes per batch. So the 90 cents goes unnoticed, and the first sign is a bank balance that doesn't match how busy you've been.

How TaroStack does it

In TaroStack the actual cost is worked out for every batch, on its own, as it's recorded. When Ana records the kūlolo, the recipe takes the grated taro and the coconut milk from the lots she used, first-expired-first-out unless she picks another, and each lot carries the price you really paid for it, freight included. The first 10 cans come out at $2.25 and the next 6 at $2.45, because that's what FIFO cost means, and nobody has to find an invoice. She records the 42 good packs, the cracked ones carry no cost out, and the batch shows its actual cost next to its standard cost. One limit, plainly: TaroStack doesn't turn labor time into dollars yet, so the labor and overhead lines above are still yours to add.

So the question this whole article worked through by hand, what did that batch really cost and why, is answered before she's cleaned the pans. Over a few weeks, TaroStack also checks from your batch history whether a recipe yields what it claims, which is how a pan that keeps cracking stops being bad luck and becomes a number you can act on. Price creep per supplier shows up in a report of its own, so the taro price rise is visible too.

Recipes, batches and true cost are on Standard, $99 a month, and the first 30 days are free. Bring your recipes in from a spreadsheet and cost your next batch for real. If you'd like a hand setting up, ask, and we'll do it with you.

Questions people also ask

What is the batch costing formula?

Cost per unit = total batch cost ÷ good units produced, where total batch cost is materials, packaging, labor and overhead for that batch. Use good units, not planned units: 42 sellable packs, not the 48 the recipe promised.

What is batch costing suitable for?

Businesses that make identical products in runs: bakeries, food and drink makers, cosmetics, candles, soap, pharmaceuticals and clothing. Anywhere costing each unit separately would be pointless because every unit in a run is the same.

What is the difference between batch costing and job costing?

Job costing costs one order or project, each different from the last. Batch costing costs a run of identical units and divides by how many there are. A custom wedding cake is a job; 48 packs of kūlolo are a batch.

What is the difference between standard cost and actual cost?

Standard cost is what a batch should cost, from the recipe, expected prices and planned yield. Actual cost is what it did cost, from the lots used, prices paid and units that came out. The difference, broken into price, labor and yield, shows where to act.