Operation Costing - Similarities and Differences with Process and Job Costing with Example

This article discusses the similarities and differences between operation costing, process costing, and job costing. It explains how operation costing combines elements of both job costing and process costing. Examples from the watch manufacturing and car painting industries are provided to illustrate the application of operation costing.

Cost Accounting
Assignment

1
By student name
Professor
University
Date: 25 April 2018.
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“Operation costing – similarities and differences with process and job costing with example”
As per the author, the accountants as well as the prospective accountants are taught only for 2
systems namely the job costing and the process costing but there is a third subject “operating
costing” which should also be taught. Process costing is a costing methodology which is being
used to collect all the costs and assign them to the units being produced. This system is being
used when all the units produced or manufactured are identical (Linden & Freeman, 2017). The
cost is generally being distributed in the large batch which may be as big as one month’s
production. Job costing on the other hand is an accounting method to track the costs and revenue
in terms of a given job. It helps in the standardization of reporting for the product profitability
and helps manager to keep a track of all the costs incurred in manufacturing a product. It helps in
identifying the costs and the revenue for a given job in a one to one manner. Job costing
basically involves the accumulation of the material, labour and overheads cost.
Operation costing is the mix of the job costing and the process costing and is used in 2 below
mentioned situations:
1. When the product uses different types of raw materials and is then completed using a
common process for a large group or
2. When the large number of products are initially processed using the same process and
then finished using specific methodologies.
In both the above scenarios, we can see that operation costing establishes the relationship
between the job costing and the process costing. Job costing is applied when different costs can
be aligned for a given product when they are produced in very small quantities where process
costing is applied when a large volume of products are manufactured using identical process and
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thereby the costs can be allocated equally. Though in process as well as operation costing the
products may be homogeneous but the type and size of the material used or even the quality may
be different in case of the operation costing which is not the case in process costing (Choy,
2018).
The local contractor or manufacturer which has been chosen as examples is HMT watches who
are involved in manufacturing of watches. Considering the business, operation costing would be
the best suitable costing system to be applied. This is because in case of watch manufacturing
watch casings as well as the workings are similar and identical in the whole lot for which the
process costing can be used for determining the per unit cost (dividing the total production cost
by the number of units manufactured). On the other hand, the bands of the watch are different in
each case due to difference in sizes, the material, width, length, etc. and thus in such a scenario
job costing is to be used to determine the individual watch costs. Thus, in the given case,
operation costing is the best which includes the application of both job costing and the process
costing. Another such example is the car manufacturing and painting of the cars whereby during
manufacturing different materials, design, etc. is being used (job costing) whereas at the time of
painting, there is similarity (process costing can be applied for cost identification).
References
Choy, Y. K. (2018). Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview
Analysis. Ecological Economics, 145. Retrieved from
https://doi.org/10.1016/j.ecolecon.2017.08.005
Linden, B., & Freeman, R. (2017). Profit and Other Values: Thick Evaluation in Decision Making. Business
Ethics Quarterly, 27(3), 353-379. Retrieved from https://doi.org/10.1017/beq.2017.1
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