Operation costing

Operation costing is a hybrid system that tracks direct materials job-by-job while accumulating conversion costs across shared production operations using a process-costing approach; it suits industries where products share routes but.

ByHoang TruongUpdated July 3, 2026

See it move

Loading infographic...

A garment maker runs every style through the same cutting, sewing and finishing operations but uses different fabric for each. Operation costing tracks materials batch-by-batch, exactly as job costing does, so expensive fabric is never averaged with cheap fabric. It then accumulates conversion costs by operation and applies one rate per unit across every product that passes through, the way process costing does.

Where it fits

SubjectCost AccountingAdvancedTopicJob & Process CostingAdvanced

The formula

LaTeX

r_{k} = \dfrac{CC_{k}}{V_{k}}

Variables

$r_{k}$: Conversion cost rate per unit for operation k, applied uniformly to every product passing through (€ per unit)
$C C_{k}$: Total conversion costs (direct labour and manufacturing overhead) incurred in operation k (€)
$V_{k}$: Total number of units processed through operation k during the period (units)

Materials are tracked separately per batch via work orders; this rate is a process-costing average applied uniformly across all units using the operation.

LaTeX

\text{Product cost per unit} = DM_{\text{batch}} + \sum_{k} r_{k}

Variables

$D M_{b} a t c h$: Direct materials cost per unit charged to the specific batch work order (€)
$r_{k}$: Conversion cost rate per unit for each operation k through which the product passes (€ per unit)

Combines job-costing accuracy on materials with process-costing efficiency on conversion; suitable where products share operations but differ in materials.

Check yourself

PracticeCORE

A shoe manufacturer produces three product lines using identical cutting, stitching and finishing operations but different grades of leather. Which costing approach best matches this production environment?

Select an answer to check your understanding.