Product-costing systems do not always fall neatly into either job-costing or process-costing categories. Many production systems are hybrid systems in which both mass production and customization occur. Consider Ford Motor Company. Automobiles are manufactured in a continuous flow (suited to process costing), but individual units may be customized with different engine sizes, transmissions, music systems, and so on (which requires job costing). A hybrid-costing system blends characteristics from both job-costing and process-costing systems. Managers must design product-costing systems to fit the particular characteristics of different production systems.
Firms that manufacture closely related standardized products (for example, various types of televisions, dishwashers, washing machines, and shoes) tend to use hybrid-costing systems. They use process costing to account for conversion costs and job costing for material and customizable components. Consider Nike, which has a message for shoppers looking for the hottest new shoe design: Just do it . . . yourself! Nike is making it possible for customers to design their own shoes and clothing. Using the Internet and mobile applications, Nike’s customers can personalize with their own colors and patterns for Jordan-brand sneakers and other apparel. Concepts in Action: Hybrid Costing for Adidas Customized 3D Printed Shoes describes customization and the use of a hybrid-costing system at one of Nike’s rivals, Adidas. The next section explains operation costing, a common type of hybrid-costing system.
An operation is a standardized method or technique performed repetitively, often on different materials, resulting in different finished goods. Multiple operations are often performed within a department. For instance, a suit maker may have a cutting operation and a hemming operation within a single department. The term operation, however, is used loosely. It may be a synonym for a department or process. For example, some companies may call their finishing department a finishing process or a finishing operation.
An operation-costing system is a hybrid-costing system applied to batches of similar, but not identical, products. Each batch of products is often a variation of a single design, and it proceeds through a sequence of operations. Within each operation, all product units are treated exactly alike, using identical amounts of the operation’s resources. A key point in the operation system is that each batch does not necessarily move through the same operations as other batches. Batches are also called production runs.
In a company that makes suits, managers may select a single basic design for every suit to be made, but depending on specifications, each batch of suits varies somewhat from other batches. Batches may vary with respect to the material used or the type of stitching. Semiconductors, textiles, and shoes are also manufactured in batches and may have similar variations from batch to batch.
An operation-costing system uses work orders that specify the needed direct materials and step-by-step operations. Product costs are compiled for each work order. Direct materials that are unique to different work orders are specifically identified with the appropriate work order, as in job costing. However, each unit is assumed to use an identical amount of conversion costs for a given operation, as in process costing. A single average conversion cost per unit is calculated for each operation by dividing total conversion costs for that operation by the number of units that pass through it. This average cost is then assigned to each unit passing through the operation. Units that do not pass through an operation are not allocated any costs for that operation.