Actual, Normal and Standard Costing
Actual costing is a process where companies use actual costs for raw materials, direct labor and manufacturing overhead (Blocher, Chen, Cokins & Lin,2005). Under this method, direct materials, direct labor, variable and fixed overhead are accounted at actual cost not at a predetermined rate. One advantage of using this method is that we have themost accurate manufacturing costs. However, having accurate costs is not the best option. One major disadvantage is that there will be a delay in gathering all information and that would cause a delayin management decision (CTU Online, 2006). Also, since raw materials are not always purchased at the same price and labor workers not always perform at the same rate every month, we will havefluctuations in the cost per unit, making the units either more expensive or cheaper.
Normal costing is a process where companies use actual costs for raw materials and direct labor, but has apredetermined manufacturing overhead rate (Blocher, et. all, 2005). Under this method, direct materials and direct labor are accounted at actual cost, but overhead is accounted at a predetermined rate.One advantage of this method is that since we have a predetermined overhead rate, we will minimize the effects of overhead fluctuations. Also, we will have accurate raw materials and direct laborcosts. One disadvantage is that when we use this method, we will also encounter delays in gathering product costs (CTU Online, 2006).
Standard costing is a process where companies use apredetermined rate for raw materials, direct labor and manufacturing overhead (Blocher, et. all, 2005). Under this method, direct materials, direct labor and overhead are accounted at a predetermined rate.One advantage of this method is that we will have the quickest access to month-end production costs, although they are not as accurate as if it was done using the actual cost. By using this method,...
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