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Group 11 : Management Accounting Seminar

1510534002 Ramadhani Sardiman International Accounting


1510534013 Retno Ladyta Andalas University

Reaction Paper of Hybrid Costing (Operation Costing)

Hybrid costing is an umbrella term that refers to one or more types of cost accounting
systems. It can refer, for example, to the backflush costing procedures associated with just-in-
time inventory and to operation costing techniques that are applied when a process costing
production run takes on the features of a job order. Hybrid costing system is a combination
version of accounting using both the process costing and job costing methods. Process
costing works best for mass-produced, identical items, measuring the cost of each step in the
manufacturing process. Job costing is better suited for custom or unique products that are
produced at low volume, measuring the materials in batches. Since many companies do not
fit into either of these clear-cut categories, they choose to use a combination, or hybrid, of the
two costing systems.

There are many reasons that a hybrid costing method is popular. For starters, a hybrid
costing method can in some circumstances be more accurate and detailed, finding costs both
of materials and labor as well as the individual methods and steps used. There are many
thousands of products and companies that will need both simply to fit the needs of their
product. Companies that have products that are mass produced as well as custom products
would benefit from a hybrid costing system, as well as companies that sell products that are
partially mass-produced and partially custom. A hybrid costing system uses elements of both
the process costing and job costing systems to analyze the cost of producing a product. Take
a Harley Davidson motorcycle for example. The motorcycle model itself is mass-produced.
This makes the bike a likely candidate for the process costing system. The only problem is
that each Harley Davidson motorcycle can be completely customized with hundreds of
different parts and paint schemes. Since each bike is custom order, the job costing system can
also be used. In this case, cost accountants and managers would most likely use a hybrid
costing system to track the manufacturing expenses of producing a motorcycle. Process
costing systems would be used for the mass produced parts like the bike frames. Where as,
job costing systems would be used for the customized parts and custom assembly processes
on each motorcycle.

Hybrid costing is used in situations where products have some common


characteristics and also some individual characteristics. Shoes, for other example, have some

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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.

One issue to consider is the increased time and cost of a hybrid system. Companies
should weigh the benefits versus the cost before implementing basically two different costing
systems. A hybrid system should only be used when the results of accounting differ greatly
compared to when using only one type of costing system.