COST ACCOUNTING
MANUFACTURING OVERHEAD
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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In actual costing, all costs are actual costs including the overhead cost that will likely vary from month to month because it relies on actual production and situations that often face uncertainties
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In actual costing, all costs are actual costs including the overhead cost where the information about it will only can be known at the end of the month or at the end of the accounting year.
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In normal costing, the predetermined overhead rate that used to assign manufacturing overhead cost to products is more constant and realistic.
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In normal costing, production cost can be determined before the production begins so it is more suitable for product pricing
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Actual costing is used for reporting purposes only
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Detailed explanation-1: -Actual costing uses the actual cost of materials and labor to calculate production costs. This is beneficial when analyzing a specific portion of the production process and an exact accounting of costs is needed. Normal costing uses indirect materials and labor costs to estimate production costs.
Detailed explanation-2: -Normal costing allows team members to accurately set goals and meet specific targets for production rates and costs, as they have a per-unit overhead price that they can aim to meet. As you conduct actual costing calculations after producing products, it is more difficult to use in goal-setting.
Detailed explanation-3: -The biggest advantage for normal costing is that it’s a fairly accurate method if the budgeted numbers for the standard overhead rate are good. It uses a smoother long-term rate for overhead allocation rather than actual numbers, which can include large variation and spikes in price.
Detailed explanation-4: -Both actual and normal costing methods use actual amounts for direct material and labor costs. The difference is in how the overhead is allocated to each item produced. Actual costing uses actual mounts for the direct materials and labor, while normal costing just uses the actual amounts.
Detailed explanation-5: -The difference between actual cost and standard cost is called variance. A variance is unfavorable if actual cost is higher than standard cost. If actual cost is lower, the variance is favorable.