Normal Costing: Advantages and Applications
Normal costing is a cost accounting method that uses predetermined standard costs to calculate the cost of goods sold. This method is often preferred by managers because it provides early information, simplifies cost estimation, and offers a comprehensive view of total costs.
Key Facts
- Early Information: Normal costing provides managers with information earlier, allowing them to take corrective actions in a timely manner.
- Cost Estimation: Normal costing uses predetermined costs based on historical data or budgeted amounts, making it simpler to calculate costs.
- Combining Direct and Indirect Costs: Normal costing combines both direct and indirect costs for production processes, providing a comprehensive view of the total costs involved.
- Assumption of Little Variance: Normal costing assumes little variance in regular production costs, making it easier to predict and plan for expenses.
- Custom Job Costing: Normal costing can also be used in custom job costing, where predetermined rates for overhead and indirect costs are derived from normal costing.
Early Information
Normal costing provides managers with information earlier than actual costing. This is because predetermined costs are used, which are based on historical data or budgeted amounts. This allows managers to identify cost variances and take corrective actions in a timely manner.
Cost Estimation
Normal costing is simpler than actual costing because it uses predetermined costs. This makes it easier to calculate costs and estimate the cost of goods sold. This can be particularly useful for companies that produce a variety of products or services, as it allows them to quickly and easily calculate the cost of each item.
Combining Direct and Indirect Costs
Normal costing combines both direct and indirect costs for production processes. This provides a comprehensive view of the total costs involved in producing a product or service. This information can be used to make decisions about pricing, production, and marketing.
Assumption of Little Variance
Normal costing assumes that there will be little variance in regular production costs. This assumption makes it easier to predict and plan for expenses. This can be beneficial for companies that operate in stable markets with predictable costs.
Custom Job Costing
Normal costing can also be used in custom job costing. In this type of costing, predetermined rates for overhead and indirect costs are derived from normal costing. This allows companies to accurately assign costs to specific customer jobs.
Conclusion
Normal costing is a widely used cost accounting method that offers several advantages to managers. It provides early information, simplifies cost estimation, and offers a comprehensive view of total costs. Additionally, normal costing can be used in custom job costing.
References:
- Quizlet: ACCY 309 Exam 2 Flashcards (https://quizlet.com/524905916/accy-309-exam-2-flash-cards/)
- Chron: Actual Cost Tracking vs. Normal Costing (https://smallbusiness.chron.com/actual-cost-tracking-vs-normal-costing-34087.html)
- Finance Strategists: Difference Between Actual Costing and Normal Costing (https://www.financestrategists.com/accounting/cost-accounting/cost-volume-profit/actual-costing-vs-normal-costing/)
FAQs
What is normal costing?
Normal costing is a cost accounting method that uses predetermined standard costs to calculate the cost of goods sold.
Why do managers prefer normal costing?
Managers prefer normal costing because it provides early information, simplifies cost estimation, and offers a comprehensive view of total costs.
How does normal costing provide early information?
Normal costing uses predetermined costs, which are based on historical data or budgeted amounts. This allows managers to identify cost variances and take corrective actions in a timely manner.
How does normal costing simplify cost estimation?
Normal costing is simpler than actual costing because it uses predetermined costs. This makes it easier to calculate costs and estimate the cost of goods sold.
How does normal costing offer a comprehensive view of total costs?
Normal costing combines both direct and indirect costs for production processes. This provides a comprehensive view of the total costs involved in producing a product or service.
Can normal costing be used in custom job costing?
Yes, normal costing can be used in custom job costing. In this type of costing, predetermined rates for overhead and indirect costs are derived from normal costing. This allows companies to accurately assign costs to specific customer jobs.
What are the limitations of normal costing?
Normal costing assumes that there will be little variance in regular production costs. This assumption may not hold true in all cases, which can lead to inaccurate cost calculations. Additionally, normal costing may not be suitable for companies that produce a wide variety of products or services, as it can be difficult to determine accurate predetermined costs for each item.
When should managers consider using actual costing instead of normal costing?
Managers should consider using actual costing instead of normal costing when there is significant variation in production costs, when the company produces a wide variety of products or services, or when accurate cost information is needed for decision-making.