Chapter 16: Decision Analysis: Hybrid Costing System

In a hybrid costing system—also known as an operation costing system— elements of both process costing and job order costing are combined. This approach is often used in industries where production involves repetitive steps for different items, each requiring some customization. The car manufacturing example you provided illustrates this well: while the main assembly is a uniform process (process costing), direct materials like custom wheels and sound systems vary for each car, requiring job order costing. Example of Hybrid Costing in Car Assembly 1. Process Costing for Assembly Costs: o In a car assembly line, the basic assembly steps (welding, painting, etc.) are almost identical for each car, making process costing suitable. o For instance, if the assembly cost per car is $22,600, this cost is spread evenly across all units. 2. Job Order Costing for Custom Additions: o Specific customer requests for custom wheels or sound systems require different materials and costs, which are tracked separately using job order costing. o The custom costs per car can range between $23,460 and $24,440 based on customer selections. 3. Total Cost Calculation: o For each car, the total cost combines the base assembly cost with the added job order cost for custom components. 4. Selling Price with Markup: o If the company aims for a 20% markup, selling prices are calculated as 120% of the total cost. For example, if the total cost per car ranges from $23,460 to $24,440, the selling price will range from $28,152 to $29,328. Process Yield in Hybrid Costing Yield measures production efficiency by calculating the output-to-input ratio. Lower-than-expected yield can indicate inefficiencies, such as material defects or process issues. Here’s how yield is computed and used in hybrid costing: 1. Calculating Yield: o Yield = (Units Produced Without Defects / Units Entered into Production) × 100. o For example, if Ford intended to produce 10,000 Mustangs but only 9,900 were defect-free, the yield would be 99% (9,900 ÷ 10,000). 2. Addressing Yield Issues: o If the yield is low, managers investigate to determine the cause, whether it’s due to lower-quality materials or flaws in production. For instance, Hershey’s use of data analytics to adjust Twizzlers' sizes led to yield improvements by enabling better control over cooking and ingredient use, saving $500,000 per batch. Example Calculations Using Weighted Average and FIFO Methods in Process Costing In process costing, methods like weighted average and FIFO are used to calculate costs in departments. Here’s how these calculations are typically done: 1. Physical Unit Flow Reconciliation: o Account for all units in a department, including beginning inventory, units started, and units completed. 2. Equivalent Units of Production: o Compute equivalent units for direct materials and conversion costs (labor and overhead) based on work completed during the period. 3. Cost per Equivalent Unit: o Divide total costs by the equivalent units to determine the cost per unit for both materials and conversion costs. 4. Assign and Reconcile Costs: o Costs are assigned to units that are completed and transferred out as well as to ending work in process. Journal Entries in a Hybrid System for Process Costing (Example: Garcia Manufacturing) For a hybrid costing system like Garcia Manufacturing, where products pass through molding and assembly, journal entries can include: 1. Raw Materials Purchase: plaintext Dr Raw Materials Inventory Cr Accounts Payable 2. Direct and Indirect Materials Usage: o Direct materials: plaintext Dr Work in Process - Molding Dr Work in Process - Assembly Cr Raw Materials Inventory o Indirect materials: plaintext Dr Factory Overhead Cr Raw Materials Inventory 3. Direct and Indirect Labor Usage: o Direct labor: plaintext Dr Work in Process - Molding Dr Work in Process - Assembly Cr Wages Payable o Indirect labor: plaintext Dr Factory Overhead Cr Wages Payable 4. Other Overhead Costs (e.g., paid in cash): plaintext Dr Factory Overhead Cr Cash 5. Applying Overhead to Molding and Assembly: plaintext Dr Work in Process - Molding Dr Work in Process - Assembly Cr Factory Overhead 6. Transfer of Partially Completed Goods: plaintext Dr Work in Process - Assembly Cr Work in Process - Molding 7. Transfer to Finished Goods and Sales: o Finished goods: plaintext Dr Finished Goods Inventory Cr Work in Process - Assembly o Sales on credit: plaintext Dr Cr Dr Cr Accounts Receivable Sales Revenue Cost of Goods Sold Finished Goods Inventory This hybrid system enables companies to adapt cost tracking to the specific needs of both standardized processes and customized components, helping businesses more accurately manage costs, improve production yield, and set profitable prices.