Definition of Normal Costing
Normal costing for manufactured products consists of following:
- Actual cost of materials
- Actual cost of direct labor
- Applied manufacturing overhead cost based on a predetermined manufacturing overhead rate
The three product costs are used for calculating the cost of goods sold and the cost of the various inventories.
If there is a difference between the total amount of overhead costs applied to the products and the total amount of actual overhead costs incurred, the difference is referred to as a variance. If the amount of the variance is not significant, it will usually be assigned to the cost of goods sold. If the variance is significant, it should be prorated to the cost of goods sold, the work-in-process inventory, and the finished goods inventory based on their amounts of applied overhead.
Definition of Standard Costing
Standard costing for manufactured products consists of the following:
- Predetermined materials costs
- Predetermined direct labor costs
- Predetermined manufacturing overhead costs
These standard costs are used to calculate the manufacturer's cost of goods sold and inventories.
If the actual costs vary only slightly from the standard costs, the resulting variances will be assigned to the cost of goods sold. If the variances are significant, they should be prorated to the cost of goods sold and to various inventories based on their amounts of the standard costs.