Hybrid costing system definition
/What is a Hybrid Costing System?
A hybrid costing system is a cost accounting system that includes features of both a job costing and process costing system. A hybrid costing system is useful when a production facility handles groups of products in batches and charges the cost of materials to those batches (as is the case in a job costing environment), while also accumulating labor and overhead costs at the departmental or work center level and allocating these costs at the individual unit level (as is the case in a process costing environment).
When to Use a Hybrid Costing System
Hybrid costing is most commonly used in situations where there is identical processing of a baseline product, as well as individual modifications that are made beyond the baseline level of processing. For example, this situation arises when identical products are manufactured until they reach the painting operation, after which each product receives a different coating, with each coat having a different cost.
As another example, a company produces a variety of refrigerators, all of which require essentially the same processing, but differing amounts of materials. It can use a job costing system to assign varying amounts of materials to each refrigerator, while using the process costing method to allocate the cost of labor and overhead equally across all of the refrigerators produced.
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The key issue in choosing to use a hybrid system is whether certain parts of the production process are more easily accounted for under a different system than the one used by the bulk of the manufacturing operation. Many companies do not realize that they are using a hybrid costing system - they have simply adapted their cost accounting systems to the operational requirements of their business models.
Disadvantages of a Hybrid Costing System
A consideration when using a hybrid system is the added cost of using essentially two different cost tracking systems, rather than a single cost tracking concept for all operations. This may require more data collection, which can slow down the manufacturing process if employees are being called upon to manually collect the extra data. Consequently, you should only use a hybrid system if the resulting information is significantly different from what would have been derived from using just a job costing system or just a process costing system. Furthermore, you should be actively using this additional information to make decisions; otherwise, it is not cost-effective to operate a hybrid costing system.
Terms Similar to Hybrid Costing System
A hybrid costing system is also known as an operation costing system.