What is Operation Costing System?

So many companies are now-a-days able to customize what were previously mass-produced items. In such circumstances, neither job order nor process costing techniques are perfectly suited to attach costs to output. Thus, companies may choose to apply a hybrid costing system that is appropriate for their particular processing situation. A hybrid costing system is otherwise known as Operation Costing System.

An Operation Costing System/ a hybrid costing system combines certain characteristics of a job order system and a process costing system. A hybrid system would be used, for example, in a manufacturing environment in which various product lines have different direct materials, but similar processing techniques.

To illustrate the need for hybrid systems/Operation Costing System, assume you order an automobile with the following options: leather seats, a Bose stereo system and compact disk player, cruise control, and pearlized paint. The costs of all options need to be traced specifically to your car, but the assembly processes for all the cars produced by the plant are similar. 

 

The job order costing feature of tracing direct materials to specific jobs is combined with the process costing feature of averaging labor and overhead costs over all homogeneous production to derive the total cost of the automobile you ordered. It would not be feasible to try to use a job order costing system to trace labor or overhead cost to your car individually, and it would be improper to average the costs of your options over all the cars produced during the period. The accompanying News Note reflects a build-to-order approach in the automobile industry.