Process may consist of several operations

Sometimes, a process may consist of several operations. Each operation in each process or stage of production is separately costed. It represents a refinement of process costing. Operational costing refers to the determination of unit operation cost by each operation forming part of a production process. In other words, it refers to conversion cost i.e. cost of labor and overheads. At the end of each operation, the unit operation cost is computed by dividing the conversion cost by output. The procedure of costing for operation is the same as for process costing. Material, labor and expenses are recorded separately for each operation and cost of one operation is transferred from one operation to another as in the case of process costing. The total cost of product is calculate  by totaling the cost of several operations through which it passes. In computing the material cost, the initial input weight has to be taken and not the ultimate output weight.

When a series of operation is carried out to convert raw materials into the finished production, rejections may occur at the end of each operation. To find out the ultimate conversion cost of specified quantity of output, regard is to be had to the cumulative effect on conversion costs of the rejection at each operation i.e. the cost per 100 units for cost of final output. Computing such cost involves working back from the final output to first operation stage