Hybrid Costing System
A hybrid costing system, also known as a mixed or composite costing system, combines the features of both job order costing and process costing. This system is used when a company’s products are somewhat unique but are still produced in a continuous process.
In other words, it’s used when there is mass production of similar items, but where some customization also takes place. The hybrid costing system allows for tracking both the cost of each individual job and the cost of each process.
A common form of hybrid costing is operation costing. In this system, products are mass-produced, similar to process costing, but the company can still provide customization, similar to job costing.
Here’s how it works:
- Material Costs: The cost of direct materials is usually traced to each job as in job costing. That’s because even though the production is in bulk, the direct materials can be significantly different for each job.
- Labor and Overhead Costs : The costs of direct labor and manufacturing overhead are usually allocated using a process costing method. These costs are often similar for each product and can be allocated to different processes.
An example of an industry that may use a hybrid costing system is the food processing industry. The base product (e.g., a type of snack) may be produced through a continuous process, but customization (e.g., different flavors or packaging) can be added based on specific job orders.
Example of a Hybrid Costing System
Let’s take a company named “BikeMaster” that manufactures bicycles as an example of a hybrid costing system.
BikeMaster produces bicycles in large batches (process costing component), but it also customizes bicycles according to customer requirements (job costing component).
- Material Costs: Materials such as frames, wheels, and handlebars are ordered specifically for each job based on the customer’s customization requirements (like color, type of seat, and type of handlebars). The cost of these materials is traced directly to each individual job.
- Labor Costs: The labor costs are also traced to each job. For example, if one custom bike requires special hand-painted designs, the labor cost associated with this would be allocated to that specific job.
- Overhead Costs: Overhead costs, such as utilities, factory rent, and the cost of operating machinery, are harder to trace to each job. These costs are more related to the overall production process rather than individual jobs. Therefore, BikeMaster allocates overhead costs based on a predetermined overhead rate which could be based on direct labor hours or machine hours.
For instance, if overhead costs typically run at $20 per hour of labor, and one bike takes 5 hours to produce, the overhead cost allocated to that bike would be $100.
This way, BikeMaster is able to account for costs in a manner that reflects its production process—mass production of bicycles with individual customization.
Remember, in a real-world scenario, the cost calculations would be more complex and would take into account various factors including indirect labor, indirect materials, and other costs that have not been considered in this simplified example.
