Question

With respect to overhead, what is the difference between normal costing and standard costing?

Answer 1

The main distinction between normal costing and standard costing is that the former uses actual expenses for direct labor and supplies while the latter does so using set prices.

Comparing normal costs to average costs and budgeted costs:

• Actual rates are used to assign indirect costs under actual costing. Under normal costing, the standard rate computed at the start of the year is used to determine how to apportion indirect costs based on actual consumption. According to the budgeted costing technique, indirect costs are assigned based on planned usage and a standard budgeted rate that was calculated at the start of the year.
• Based on actual indirect costs incurred and actual cost drivers, the actual rate is calculated. Based on projected indirect and expected cost driver, a standard rate is calculated.

Actual costing

Benefits:

No overabsorption or under absorption of overheads exists.

Pricing will allow for the full recovery of indirect costs.

Limitations:

• It is not helpful for decision making since the prices cannot be pre-determined.
• It a tedious and time-consuming process since the actual overheads incurred has to be accounted

Normal costing

Benefits:

• Helpful for making decisions, such as when setting prices or submitting bids or quotes.
• Commonly employed in cost management and expense control, for instance: Budget flexibility and variance analysis.

Limitations:

• At the end of the term, the overabsorption or under absorption of overheads must be calculated.
• The cost of additional labor is involved.

Budgeted costing

Benefits:

• It is helpful for planning for strategic goals, such as achieving industry cost leadership status.
• It aids in establishing responsibility and accountability for the various divisions.

Limitations:

• It fails to take into account the business's actual operating circumstances and costs.
• Since the actual conditions are not taken into account, it is not flexible.
• It may render the budgeting process useless.

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