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CA Intermediate · Cost and Management Accounting · Process & Operation Costing

A garment manufacturer produces several styles of shirts. All styles pass through cutting, stitching and finishing, but the fabric and trims differ from style to style. Which costing approach is most suitable, and how does it treat costs?

Operation costing is suitable. Because the fabric and trims differ by style while the operations are common, material is charged to each batch directly, and conversion costs are accumulated for each operation and absorbed at an average rate per unit.

  1. AProcess costing, with all material and conversion costs averaged over the whole output of the period
  2. BOperation costing, with material costs charged to each batch or style and conversion costs averaged by operationCorrect
  3. CJob costing, with every cost traced to a single customer order only
  4. DService costing, with costs collected per unit of service rendered

Explanation

Operation costing is a hybrid of job/batch and process costing. Material is specific to each batch or style, so it is charged directly. Conversion costs are collected for each operation and absorbed using an average rate. Pure process costing would wrongly average the differing material costs across styles.

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