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Operation Costing

Operation costing is not a new method but it is the technique to use the method of job costing, batch costing and process costing for calculating the cost of that business products whose production are operating day and night. So, all expenses in operation costing  are recurring in nature.  Operation costing is also useful where units of products are same and one or two type products are producing.

Two Important Things in Operation Costing

1. #  We can identify the units of production by different methods of unit measurements.

2. # Like job costing, we will calculate total cost by following formula

Direct Material + Direct labor + Direct Expenses + Overheads

or we can also calculate total operating cost with following formula


Fixed cost + Veriable cost

If the prices of material and labor  will increase, then we have facility to inflate cost in this operating cost.

Operation Costing Example

We can explain operating costing with following simple example:

Make Cost and Profit statement using operation costing for Popular gas cylinder manufacturing company. We are giving you following raw data.

Stock of material on 1-1-2009  Rs. 35000
Stock of material on 31-12-2009  Rs. 4900
Purchase of materials Rs. 52500
Direct Wages Rs. 95000
Factory expenses Rs. 17500
Establishment expenses Rs. 10000
Completed stock in hand on 1-1-2009 Rs. Nil
Completed stock in hand on 31-12-2009 Rs. 35000
Sales Rs. 189000

The number of gas cylinder manufactured during the year 2009 was 4000. The company wants to quote for a contract for the supply of 1000 gas cylinders during the year 2010. The gas cylinder to be quoted are of uniform quality and make and similar to those manufacturing in the previous year, but cost of materials has increased by 15% and  factory wages by 10%

Prepare a statement showing the price to be quoted to give the same percentage of net profit on turnover as was realised during the year 2009. Assuming that the cost per unit overhead will be same as in the previous year.




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Accounting Education: Operation Costing
Operation Costing
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