Normal costing uses a predetermined annual overhead rate to assign manufacturing overhead to products. In other words, the overhead rate under normal costing is based on the expected overhead costs for the entire accounting year and the expected production volume for the entire year.
Under actual costing each month's actual costs and each month's actual production volume are used to assign overhead costs. Since most companies will experience month to month fluctuations in activity, the actual monthly overhead rates will likely vary from month to month.
Normal costing will result in an overhead rate that is more uniform and realistic for all of the units manufactured during an accounting year.
