Normal Costing

Normal costing refers to a product costing system that adds actual direct material, actual direct labor, and applied manufacturing overhead costs to the work-in-process inventory.

Actual Costing

An actual costing system is a product costing system that adds actual direct material, actual direct labor, and actual manufacturing overhead costs to the work-in-process inventory.

Frequently Asked Questions

Is the actual costing system a product costing system?

The actual costing system is also referred to as an allocation costing system. It is not a product cost computer software program like the standard and normal costing systems.

Is normal costing a product costing system?

A normal or absorption-costing system does not allocate manufacturing overhead costs; rather, these costs are added to the cost of goods sold as incurred. As a result, during periods in which manufacturing overhead costs exceed production volume, there is an accumulation of manufacturing overhead in the work-in-process and finished goods inventory accounts.

Is actual costing a product costing system?

Under normal costing, only variable production costs - direct material and direct labor - are included in the cost of goods sold. The fixed manufacturing overhead costs assigned to production units remain as inventory until they are absorbed into unit product costs. If overheads exceed production, then rather than raising finished-goods inventories, a company will incur losses on its work-in-process (wip) inventories and product costs.

What is the difference between actual costing and normal costing?

In actual costing, total manufacturing cost for a period is divided into two parts: variable cost and fixed cost. Variable costs are direct material, direct labor, and factory overhead allocated to production during a given time period. Fixed costs include Depreciation of the existing Fixed Assets, fixed costs that are not identified with any specific department or time period, and other fixed costs.

What is the difference between actual costing and absorption costing?

Absorption costing is the process of including all manufacturing overhead cost in factory overhead at the end of a given accounting period. The under- or overapplied overhead will be transferred to inventory accounts.

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