Actual Costing VS Normal Costing Flashcards
(15 cards)
What is Actual Costing?
A costing method that assigns actual material, labor, and overhead costs to jobs or products. It uses real, historical cost data.
How does technology improve Actual Costing today?
By using barcode scanning and online records to reduce errors and speed up the tracking of materials and labor time.
Give an example of how technology supports cost control in Actual Costing.
Using barcode scanners to automatically update inventory and labor costs in real time, reducing manual entry errors.
What is Normal Costing?
A costing method that traces actual direct costs but applies overhead using a pre-budgeted rate instead of actual overhead costs.
When would a company prefer Normal Costing over Actual Costing?
When actual overhead costs fluctuate a lot, making it easier to use a stable, budgeted rate during production.
How is the overhead rate calculated in Normal Costing?
Budgeted Overhead = Estimated Annual Indirect Costs ÷ Estimated Annual Quantity of Allocation Base.
If a company uses Normal Costing, when do they adjust for overapplied or underapplied overhead?
At the end of the accounting period, they reconcile applied overhead with actual overhead incurred.
What is Standard Costing?
Setting pre-determined costs for materials, labor, and overhead based on efficient operation standards. Used for pricing and cost control.
What are key objectives of Standard Costing?
To control costs, set performance targets, fix responsibility, and improve budgeting effectiveness.
What documents are created in Standard Costing?
Standard material cost sheet, labor standard sheet, overhead standard sheet, standard hour, and standard cost card.
How can Standard Costing help management take action?
By highlighting variances between standard and actual costs, allowing managers to investigate problems and correct inefficiencies.
Give an example of an industry where Standard Costing is very useful.
Textile manufacturing, where production is repetitive and products are similar.
List advantages of using Standard Costing.
Helps with price setting, production planning, variance analysis, management by exception, cost awareness, and financial reporting.
What are some limitations of Standard Costing?
High technical skills needed, costly to maintain, possible outdated standards, difficulty adjusting to rapid changes.
Which industries commonly use Standard Costing?
Process industries (oil, chemicals), repetitive manufacturing (engineering, textiles), and service industries (like healthcare).
