Operation Costing System or Hybrid Costing System:

Learning Objectives of this article:

1. 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. (For process costing system click here)

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.

You may also be interested in other useful articles from “process costing system – addition of materials and beginning inventory” chapter:

1. Increase in Unit Cost Due to Addition of Materials
2. Addition of Materials – Increase in units and Change is Unit Cost
3. Beginning Work in Process Inventories – Average Costing Method
4. Cost of Production Report FIFO
5. Average Costing Method Versus FIFO Costing Method – Process Costing
6. Difficulties Encountered in Process Costing Procedure
7. Discussion Questions and Answers

8. Similarities and Differences between Job Order and Process Costing System

9. Operation Costing /Hybrid Costing System

Other Related Accounting Articles:

• Process Costing System
• Characteristics and Procedure of Process Costing System
• Beginning Work in Process Inventories
• Beginning Work in Process Inventories
• Difficulties Encountered in Process Costing Procedures
• Costing By Departments
• Process Costing System – Case Study
• Process Costing System
• Product Flow in Process Costing System
• Discussion Questions and Answers