Normal costing is a budgeting method used to estimate and allocate production costs based on anticipated total efficiency of production. Rates in normal costing are based on the expected costs and efficiencies. It records actual expenditures as they occur during production. Normal costing is commonly used when it is possible to assign actual costs to products.
Key Facts
- Normal costing is a budgeting method used to estimate and allocate production costs based on anticipated total efficiency of production.
- Rates in normal costing are based on the expected costs and efficiencies.
- It records actual expenditures as they occur during production.
- Normal costing is commonly used when it is possible to assign actual costs to products.
Actual Costing:
- Actual costing is a budgeting method that uses the real expenditures incurred in the production of a product or service.
- Rates in actual costing are based on the costs actually incurred.
- It provides a more accurate reflection of the actual costs of production.
- Actual costing is used when it is difficult to predict or assign actual costs to products.
Actual Costing
Actual costing is a budgeting method that uses the real expenditures incurred in the production of a product or service. Rates in actual costing are based on the costs actually incurred. It provides a more accurate reflection of the actual costs of production. Actual costing is used when it is difficult to predict or assign actual costs to products.
Comparison of Normal Costing and Actual Costing
The following table compares normal costing and actual costing:
| Feature | Normal Costing | Actual Costing |
|---|---|---|
| Costing Method | Uses budgeted rates to assign direct costs and overhead to cost objectives | Uses actual costs of direct materials and labor but relies on a budgeted figure for overhead costs |
| Accuracy | Less accurate since it uses estimated costs | More accurate since it uses actual costs |
| Usefulness | Useful when it is possible to assign actual costs to products | Useful when it is difficult to predict or assign actual costs to products |
Conclusion
Normal costing and actual costing are two different methods for budgeting and allocating production costs. Normal costing is based on estimated costs and efficiencies, while actual costing is based on actual costs incurred. The choice of which method to use depends on the specific circumstances of the business.
References
- Indeed Editorial Team. (2022, August 11). Actual costing vs. normal costing: What’s the difference? Indeed Career Guide. https://www.indeed.com/career-advice/career-development/actual-costing-vs-normal-costing
- Tamplin, T. (2023, November 27). Difference between actual costing and normal costing. Finance Strategists. https://www.financestrategists.com/accounting/cost-accounting/cost-volume-profit/actual-costing-vs-normal-costing/
- Kenton, W. (2023, July 19). Extended normal costing: What it is, how it works, example. Investopedia. https://www.investopedia.com/terms/e/extended-normal-costing.asp
FAQs
What is normal costing?
Normal costing is a budgeting method that uses predetermined rates to assign direct costs and overhead to cost objectives. It is based on the expected costs and efficiencies of production.
What is actual costing?
Actual costing is a budgeting method that uses the actual costs incurred in the production of a product or service. It provides a more accurate reflection of the actual costs of production.
What are the advantages of normal costing?
- It is simpler to use than actual costing.
- It can help to improve cost control by providing a standard against which to compare actual costs.
- It can help to improve efficiency by identifying areas where costs can be reduced.
What are the disadvantages of normal costing?
- It can be less accurate than actual costing, especially if actual costs differ significantly from estimated costs.
- It can lead to the accumulation of variances, which can make it difficult to track actual costs.
- It can be difficult to use when there are significant fluctuations in production costs.
What are the advantages of actual costing?
- It provides a more accurate reflection of the actual costs of production.
- It can help to improve cost control by providing a clear understanding of the actual costs of production.
- It can help to improve efficiency by identifying areas where costs can be reduced.
What are the disadvantages of actual costing?
- It can be more complex and time-consuming to use than normal costing.
- It can be difficult to use when it is difficult to track actual costs.
- It can be difficult to use when there are significant fluctuations in production costs.
When should normal costing be used?
Normal costing should be used when it is possible to assign actual costs to products and when there are not significant fluctuations in production costs.
When should actual costing be used?
Actual costing should be used when it is difficult to assign actual costs to products or when there are significant fluctuations in production costs.