Operation costing is a cross between job-order costing and process costing. This process is used when an organization produces great amounts of similar products that require the use of different materials, for example, pants made from many different materials such as wool, cotton, polyester, and spandex. In job-order costing, multiple files are used to track the costs of materials used for the job such as data sources for product costing, costing estimation for jobs in the future, and internal and external financial reporting.
When using costing methods, assigning cost can be very difficult, and the best way to do this is to use predetermined overhead rates to assign manufacturing overhead costs. This rate is usually determined at the beginning of the year and stays constant for the whole year. Predetermined overhead rates remove any fluctuations in the application of manufacturing overhead rates to various jobs. The final product costs are said to be normal costs because of this. The manufacturing overhead account is important and is used very often. It records both the actual overhead and the overhead that is applied to the work in process inventory. When normal costing is used, the actual overhead is almost never equal to the applied manufacturing overhead. This difference is known as over variance. This variance can either be overapplied or underapplied. Underapplied variances occur when the actual cost is greater than what was actually applied. Overapplied variances occur when the actual cost is less than what was actually applied.
Standard costing and actual costing are the alternative methods to normal costing. In actual costing, the actual costs of both direct and indirect resources are applied to the products. In standard costing, costs are assigned to products after applying predetermined or standard rates for both direct and indirect costs.
It is difficult to manage jobs, but it is important as this is how cost is minimized, and quality is maximized. Having this philosophy helps to maintain a high level of customer satisfaction. One of the common ways of managing jobs is by implementing project percentage of completion charts. This is a chart that shows how much of the project should be completed at a set time and how much actually has been completed. Another commonly used method is the Gantt chart, which shows all the necessary stages needed to complete the project and in what order they should be completed.