Operation Costing | Cost Accounting

The below mentioned article provides a note on operation costing.

Operation Costing is a refined method of Process Costing. In Process Costing, each process or stage of production is costed separately. The manufacture of a product may consist of several operations. In Operation Costing, costs are collected for each operation instead of each process or stage of manufacture.

This will facilitate better control of costs than in Process Costing. The procedure of operation is similar to that of Process Costing. Materials, labour and other expenses are collected separately for each operation. At the end of accounting period, the unit operation cost may be computed by dividing the total operation cost by total output.

The cost of each such operation is called ‘operation cost’. Operation Costing is applied where standardized goods or services result from a sequence of repetitive and more or less continuous operations to which costs are collected and averaged over the units produced during the period.

When the goods are processed through different operations, rejection may arise at the end of each such operation and to determine the cost of each operation for a specified quantity of output, due consideration will be given to the cumulative effect on conversion cost of the rejection of each such operation. Operation Costing is applied where continuous operations or processes produce identical units of output.

Illustration:

An article undergoes three successive operations from raw materials to finished product stage.

The following information is available from the production records of a particular period:

Find what should be the input in the first operation in number of pieces to obtain a finished product of 100 pieces after the last operation.

Calculate cost of raw material required to produce one piece of finished product from the following particulars:

Weight of finished piece – 100 gms. per piece Price of raw material – Rs. 10 per kg.

Solution:

 

 

 

 

 

Above statement shows that 198 number of pieces are to be put in the first operation to get 100 pieces of finished product. In respect of raw material, cost of finished piece of 100 gms. will be Rs. 1.98 only.

For 100 units in operation II, one should have 110 (as the number of rejects is 10%) and for I operation it should be 165 (as the % of rejects is 50% i.e., 110 + 55).