Approaches of Costing
We have 2 approaches of costing:
1-Actual costing
It is a job costing system that uses the actual cost to determine the cost of each individual job
It calculates the cost through tracing direct costs to a cost object by using the actual direct cost rates times the actual quantity of the direct cost inputs & it allocates in direct costs based on the actual in direct cost rates times the actual quantity of the cost allocation bases
"We always trace the direct cost and allocate the in direct cost"
If we look at the actual costing method, we will find that it depends on actual data that already happened but we know that managers cannot wait until the jobs are completed to calculate or get the actual cost for each individual job, as they need approximate data for the manufacturing costs and other overhead costs such as the marketing costs which is close to the actual and can be used to make managerial decisions such as "the big one" which is pricing and product mix decisions and also for the ongoing use for the preparation of the in term financial statements
Some few companies wait up to the end of the year to get the actual manufacturing overhead to be allocated over the jobs to get the job costs
But the others use budgeted data which is a budgeted in direct cost rate for each cost pool at the beginning of the fiscal year to be used throughout the year and the overhead costs are allocated to jobs based on this rate .
As the budgeted in direct cost rate is calculated for each cost pool through dividing the budgeted annual in direct cost by the budgeted annual quantity of the cost allocation base and this method is called .
Normal Costing which is number 2
Finally,
2-Normal Costing
The normal costing is a method that traces direct costs to a cost object by using the actual direct cost rates * the actual quantity of the direct cost inputs
And allocates in direct costs based on the budgeted or applied in direct cost rates * the actual quantity of the cost allocation bases
As in Normal Costing we don't wait till end of period to get actual overheads but we use applied allocated OHs which is calculated by using base * Budgeted rate (the Budgeted rate = Budgeted OHs / Budgeted allocation base)
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