Operation Costing: Definition & Calculation

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  • 0:03 What Is Operation Cost?
  • 0:40 Process Costing
  • 1:23 Job Costing
  • 2:13 Operation Costing Calculation
  • 3:52 Lesson Summary
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Lesson Transcript
Instructor: Beth Loy

Dr. Loy has a Ph.D. in Resource Economics; master's degrees in economics, human resources, and safety; and has taught masters and doctorate level courses in statistics, research methods, economics, and management.

In this lesson, learn more about how to use operation costing. Companies often use this type of costing in manufacturing operations where specific jobs require costing and additional manufacturing processes don't allow for the assignment of individual costs.

What Is Operation Costing?

Tri-Lock makes locks and keys. Some locks work with keys while others are combination locks that work with a code. The company makes various sizes of locks. This company uses operation costing as its accounting method for costing, which entails assigning costs to the production process.

Operation costing, also known as service costing, is a costing method that combines process costing and job costing. Let's look into each of these accounting methods, process costing and job costing, so we can get a better picture of how to use operation costing at Tri-Lock.

Process Costing

The first component of operation costing is process costing. Process costing is the costing method used when products are produced with very few differences, and those differences aren't assigned a specific cost difference. So with process costing, each product is given the same cost.

Process costing is common in certain manufacturing environments. For example, it would be unduly costly if a company determined the cost of each gallon of gas produced, each hamburger made, and each bag of cat food created. When Tri-Lock produces its keys, there are slight differences in the keys, but the differences are so small there's no benefit to assigning them different costs. Therefore, they are all given the same cost due to process costing.

Job Costing

The other important piece of operation costing is job costing. Job costing is an accounting method that calculates and assigns the costs of labor, materials, and overhead to a particular job. This type of costing requires detailed accounting for each type of input. Let's take a look at each of these types of input a little closer:

  • For materials, costs are assigned to each component when it is used in the manufacturing of a good. The brass and steel used in the manufacturing of locks would fall into this category.

  • For labor, costs of employee wages are included in labor and assigned to a specific job. The labor used to machine the locks is accounted for under labor.

  • For overhead, the costs are included to account for business expenses like electricity, heat, communications, and insurance. They must be partitioned out to be assigned to a job.

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