Operation costing systems are used when the products have:

Table of Contents Show

Process Costing
Operational Costing
Production Report
Examples of Operation Costing
Terms Similar to Operation Costing

68. B) common characteristics and no individual characteristics. C) individual characteristics and no common characteristics. D) been mass produced in a continuous production process. E) some common characteristics and some individual characteristics.

Uploaded by: VroomH

Process costing and operational costing systems are used in accounting, usually in relation to the manufacturing sector. Both refer to the costs of production, but they differ in terms of methodology and application. Process costing is used in industries where the products are all basically the same, such as bricks or cement. Operational costing, on the other hand, is used in industries where the products are similar but may have some variation in terms parts or the quality of materials.

Process Costing

Process costing may be thought of as the accounting method used to account for a single manufacturing process. In process costing, one specific product is produced. The purpose of process costing is to account for costs directly associated with that production process. These costs include labor, materials and any overhead associated with production. Process costing takes into account manufacturing costs as they accumulate from one department to the next in the production process.

Operational Costing

Operational costing shares similar characteristics to process costing methods. In operational costing, the products are nearly homogeneous but may differ in terms of materials or overall quality. Laptop computers, for example, all have built-in screens and keyboards, but the size of the screen and the type of screen may differ. The hardware and software installed on each machine will also differ. The computers have common characteristics, but these characteristics also serve as distinguishing factors. Operational costing accounts for the differences in the constituent parts used to produce a product.

Hybrid

Operational costing is considered a hybrid costing method. It employs elements of process costing, but it is also partially derived from another form of manufacturing accounting known as job order costing. The differences between job order and process costing are subtle, although the purpose is basically the same. In job-order costing, costs are accounted for as the product moves from one stage of production to the next. In process costing, the costs are accumulated by department. Because each department may handle several job tasks before pushing the product on to the next department, the department's costs are recorded together.

Production Report

The end result of both operational and process costing methods is the production report. The production report details the costs of production, using whichever method is specified. The production report includes relevant information needed to assess these costs, including the quantity of units produced and the costs per unit. In process costing and operational costing, these are accounted for using either a weighted average or the first in, first out -- or FIFO -- method.

Operation costing is a mix of job costing and process costing. It may be used when a product initially uses different raw materials, and is then finished using a common process that is the same for a group of products. Or, it may be used when a product initially has identical processing for a group of products, and is then finished using more product-specific procedures.

In both cases, a mix of job costing and process costing is used to compile the cost of a product; this mixed costing environment is called operation costing. The job costing element is based on the concept that costs can be assigned to specific products, which is the case when something is produced in units of one or in very small quantities. The process costing element is based on the concept that the cost of producing a large group of products is allocated equally to all the products in that group, since they are manufactured in an identical manner.

In short, operation costing is most applicable to the more complex manufacturing environments that require a mix of different types of production processes in order to create goods.

Examples of Operation Costing

A company manufactures watches in lots of 1,000. The watch casings and workings for all 1,000 units are identical, so the company simply adds up the cost of the production run and divides by 1,000 units to arrive at the per-unit cost. In addition, watch bands are custom-made for the wrist size of the customer, and use a variety of unique materials. These costs are compiled for each individual watch. Thus, we have process costing for one portion of the production process (the watch casings and workings) and job costing for another portion (the watch bands). When combined, this is operational costing.

An example of the reverse situation is when a product initially has unique raw materials, but is then finished using a common process. For example, a company builds unique, custom-designed race cars. It uses job costing to compile the cost of each car. However, all cars are then run through a paint shop, which is essentially a fixed cost. The cost of the paint booth is allocated equally to all of the cars run through it, which is process costing. Thus, we use job costing for the first part of the production process and process costing for the second part. Again, this is an example of operation costing.