ACCT20001 Chap.4 Actual Costing, Normal Costing and Job Costing
Actual Costing, Normal Costing and Job Costing
Direct materials and direct labour are traced as they are incurred, at actual quantities and actual prices, and nothing in this chapter changes that. What changes is the overhead. Actual costing waits until the period closes, then divides the actual indirect cost by the actual base quantity, which is accurate and useless in March.
The subject explains why the wait is necessary rather than lazy: overhead items do not increase evenly with output and often benefit units made long before or after the money was spent, so allocating a machine repair to the two units made that day would produce a unit cost that describes the maintenance calendar. Normal costing solves the timeliness problem on credit.
A predetermined rate is struck before the period from budgeted indirect cost over a budgeted base, applied throughout the period to actual base quantities, and squared up at year end when the actual rate is finally known. After that adjustment both systems carry the same total, so normal costing is the same measurement delivered earlier rather than a different one.
The chapter then introduces job costing, which accumulates cost separately for each job on a job cost record, follows the cost through raw materials, work in process and finished goods, and closes with the direction rule for under-allocated and over-allocated overhead.
What this chapter covers
- 01
The five steps of allocating indirect cost under actual costing
- 02
Why the rate cannot be struck until the period closes
- 03
The price of accuracy: a cost object with no cost until year end
- 04
The predetermined rate, and the two budgeted figures inside it
- 05
Normal costing against actual costing, line by line
- 06
Why the two systems agree once the adjustment is made
- 07
Job costing: three features, three conditions, and the job cost record
- 08
Which lines on a job cost record are facts and which is a judgement
- 09
Cost flows through raw materials, work in process and finished goods
- 10
Under-allocated and over-allocated overhead, and which way the entry goes
Strike a predetermined rate and say which way the year-end entry goes
- 2The predetermined rate uses budgeted figures on both lines: $528,000 over 12,000 hours, which is $44 a machine hour.
- 2Overhead applied uses the predetermined rate and the actual base quantity: $44 multiplied by 11,800 hours, which is $519,200.
- 1Compare applied with actual: $519,200 was handed out against $514,000 actually incurred, so $5,200 too much reached production.
- 1Name the direction and the entry: overhead is over-allocated by $5,200, so cost of goods sold is reduced, which means debit manufacturing overhead and credit cost of goods sold.
Key terms
- Actual costing
- A system that allocates indirect cost using the actual rate and the actual base quantity, so the rate can only be struck at period end.
- Normal costing
- A system that allocates indirect cost throughout the period using a predetermined rate applied to the actual base quantity, then adjusts at period end.
- Predetermined rate
- Budgeted indirect manufacturing cost divided by the budgeted quantity of the allocation base, struck before the period begins.
- Job costing
- A system that accumulates cost separately for each job, where a job may be one physical item or one service engagement.
- Job cost record
- The document on which one job's traced materials, traced labour and allocated overhead are accumulated and from which its unit cost is derived.
- Overhead control account
- The account that collects actual overhead on one side and applied overhead on the other, so the gap between them is visible.
- Under-allocated overhead
- The position where actual indirect cost exceeds the amount allocated, so cost of goods sold must be increased.
- Over-allocated overhead
- The position where the amount allocated exceeds actual indirect cost, so cost of goods sold must be decreased.
- Cost of goods manufactured
- The cost transferred out of work in process into finished goods for output completed during the period.
Actual Costing, Normal Costing and Job Costing FAQ
Why not simply use actual costing all year and avoid the adjustment?
Because the answer arrives too late to be used. The actual rate depends on total overhead and total base quantity for the whole period, so no job finished in March has a cost until the year closes, and quoting, pricing and product decisions all happen before then. Normal costing accepts a small measurement error in exchange for a number that exists when the decision is made, and settles the difference at the close.
Can overhead be misallocated even if spending came in exactly on budget?
Yes, and this is worth understanding rather than memorising. The rate has two budgeted inputs, the cost in the numerator and the base quantity in the denominator, so activity running above or below the level assumed will produce a gap on its own. That is why the subject treats the year-end adjustment as routine rather than as evidence that someone estimated badly.
Which parts of a job cost record could an auditor actually verify?
The materials and labour lines, because each traces back to a requisition or a time record showing the quantity charged to that job code. The overhead line cannot be verified in the same way: it is the product of a base someone chose and a rate someone predicted. That is the honest answer to a question asking why two firms costing an identical job reach different totals.
Exam move
Practise this chapter as a sequence rather than as a set of definitions, because the exam version usually runs the whole sequence in one question. Take any pair of budget figures, strike the rate, apply it to an actual quantity, compare with an actual total, name the direction and write the entry, and do it until the direction word arrives without thinking.
Build the comparison habit now: write actual against applied as two numbers on the page before you choose between under and over, because the reversal is the most expensive single error in the first half of the subject.
When you meet the cost flow diagram, redraw it from memory with the three inventory accounts in order and check that indirect materials and indirect labour take the detour through the overhead account rather than going straight into work in process.
Working through Actual Costing, Normal Costing and Job Costing in ACCT20001? Sia is AskSia’s AI Accounting tutor — ask any ACCT20001 Actual Costing, Normal Costing and Job Costing question and get a clear, step-by-step explanation grounded in how ACCT20001 is taught and assessed. Read this chapter free, then take your hardest questions to Sia.
