Definition: Batch-level costs are expenses related to a group of products that cannot readily be traced back to an individual item. In other words, these production costs are incurred to produce a set of products or a batch and can’t be allocated to an individual unit.
A good example of a batch level cost is machine set up time. Companies manufacture products in batches because it saves time in setup and logistics. Rather than setting up a machine to run Operation A, then setting it up to run Operation B, and again for Operation C for one unit at a time, manufacturers set up the machine to run Operation A on hundreds or thousands of units before changing the machine’s setup to run Operation B.
This saves hundreds of hours in machine setup time and keeps products more consistent throughout the process. The cost of setting this machine up is now spread across hundreds or thousands of units and must be allocated to each of the units produced.
Another example could be procurement costs. These expenses are associated with ordering direct materials, receiving goods, and even paying suppliers. Since these expenses are related to the number of orders placed, they must be allocated to the group of units and not an individual product.
What Does Batch Level Costs Mean?
Quality control and inspection is also considered a batch cost because it’s associated with a group of products not a specific one. In many cases, a quality control employee will randomly pick out a small percentage of units from a group to test them for quality assurance. Even though the employee isn’t testing every piece in the group, he or she is still testing the group as a whole.
Thus, the costs associated with quality control must be attributed to the entire batch.