Operation Costing System or Hybrid Costing System:
Learning Objectives of this article:
- What is operation costing or hybrid
costing system. Explain with examples.
Definition:
Operation costing is a
hybrid costing system that employs aspects of both job order and process costing.
Explanation and
Uses of Hybrid or Operation Costing System:
Operation costing system is used in situations where products have some common
characteristics and also some individual characteristics. Shoes, for example,
have some common characteristics in that all styles involve cutting and sewing
that can be done on a repetitive basis, using the same equipment and following
the same basic procedure. Shoes also have individual characteristics. Some are
made of expensive leathers and others may be made using inexpensive synthetic
materials. In a situation such as this, where products have some common
characteristics but also must be handled individually to some extent, operation
costing may be used to determine product costs.
Products are typically handled in batches when operation costing is in use,
with each batch charged for its own specific materials. In this sense, operation
costing is similar to job order costing. However, labor and overhead costs are
accumulated by operation or by department, and these costs are assigned to units
as in process costing.
Examples of other products for which operation costing may be used include
electronic equipments (such as semi conductors), textiles, clothing, and jewelry
(such as rings, bracelets, and medallions). Products of this type are typically
produced in batches, but they can vary considerably from model to model or from
style to style in terms of the cost of raw materials inputs. Therefore, an
operation costing system is well suited for providing cost data. |
