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Operating Costing

Operating (Operational) costs are the expenses which are related to the operation of a business, or to the operation of a device, component, piece of equipment or facility. They are the cost of resources used by an organization just to maintain its existence.

Operating costs are expenses associated with the maintenance and administration of a business on a day-to-day basis. The operating cost is a component of operating income and is usually reflected on a company’s income statement. While operating costs generally do not include capital outlays, they can include many components of operating a business including:-

  • Accounting and legal fees
  • Bank charges
  • Sales and marketing costs
  • Travel expenses
  • Entertainment costs
  • Non-capitalized research and development expenses
  • Office supply costs
  • Rent
  • Repair and maintenance costs
  • Utility expenses
  • Salary and wage expenses

Operation costing is a mix of job costing and process costing, and is used in either of the following situations:

  • A product initially uses different raw materials, and is then finished using a common process that is the same for a group of products; or
  • A product initially has identical processing for a group of products, and is then finished using more product-specific procedures.

In both cases, you use a mix of job costing and process costing to compile the cost of a product; this mixed costing environment is called operation costing. The job costing element is based on the concept that you can assign costs to specific products, which is the case when something is produced in units of one or in very small quantities. The process costing element is based on the concept that the cost of producing a large group of products is allocated equally to all the

products in that group, since they are manufactured in an identical manner.

In short, operation costing is most applicable to the more complex manufacturing environments that require a mix of different types of production processes in order to create goods.

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