Product Costing
In manufacturing process, there are two main and traditional approaches to determine how to to accumulate, assign and allocate costs consumed during manufacturing activity such as material, labor and overhead costs. Managers are responsible to determine what method to fairly accumulate, assign and allocate all consumed costs to product that will represent actual product cost in purpose of sales price and cost management. There are two traditional costing method; Job (Order) Costing and Process Costing. Both of job order and process costing have each advantages and disadvantages in vice versa particularly in assigning cost consumed by work in process. To combine both of advantages and disadvantages upon job costing and process costing method, managers implemented hybrid costing.
To obtain detailed cost information, implementing hybrid cost accounting system is needed that combines process and job-order methods, based on normative (standard) accounting and actual data, by distributing product costs proportionally to processing stage.
Characteristics of Hybrid Costing
In job order costing method, product costs are accumulated, assigned and allocated to finished goods based on specific job completed. All costs consumed in completing a specific job are accumulated, assigned and allocated to job completed. In fact, for 10 units per batch, only 7 units were fully completed and the uncompleted units will finished in the next process. While job order regardless equivalent unit completed (a basic accounting assumption that costs flow along completed business activities), the consumed product cost will be accumulated for full batch (10 units) while actual product cost will be distributed for 7 unit completed. This will lead to ignore the matching principle. Ignoring accounting principle will result in misleading information for both internal and external users.
Another method of product costing is process costing method. In this approach, product costs are accumulated, assigned and allocated to finished goods upon the completion process. Process costing regardless the specific process to complete the process. Rather to distribute product costs to completed job or process, in process costing method, product costs are distributed to finished goods based on equivalent unit finished.
The hybrid cost accounting system is based on a symbiosis of the principles and procedures of the cost accounting methods for the Process Costing System and Job-Order Costing System, combines them in accordance with the characteristics of the business and management policies, and increases the efficiency of enterprise cost management. Hybrid costing system treats process as completing job-order activity while product costs are accumulated, assigned and allocated as completion a processing activity. Product costs are distributed to finished goods using equivalent unit assumption for material, labor and overhead.
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