Question

Judith, an undergraduate, enrolled in a Cost Accounting course is cramming for her final examination and is having difficulties understanding the many variations in cost accounting systems. Her cost accounting textbook uses the following terms: actual costing, normal costing and standard costing. She cannot understand why the first chapter of her textbook states that the purpose of the costing system is to calculate the cost of production, and yet the normal and standard costing systems use budgeted cost figures that have not actually been incurred. She wants to know why budgeted figures are used instead of historical cost figures in the normal and standard costing systems.

Required:

Clarify the role of actual costing, normal costing and standard costing systems in an organisation for Judith. In doing so you may consider the following questions:

1. Are costing systems designed to provide cost information only? Explain.
2. Explain how actual costing, normal costing and standard costing systems treat direct material, direct labour and overhead costs.
3. To what extent do the actual costing, normal costing and standard costing systems go beyond merely providing cost information, and assist management manage operations?

Answer 1

A cost system is designed to monitor the cost incurred by a business. The system compromised of a set of forms, processes, controls, and reports that are designed to aggregate and report to management about revenue, cost, and profitability.

Actual Costing

Actual costing uses the actual cost of material and labor to calculate production costs and actual overhead cost is used.

Normal Costing

Normal costing uses indirect materials and labor costs to estimate production costs and normal and normal overhead costs is used.

Standard Costing

Standard costing uses the predetermined cost of material and labor and also uses predetermined overhead costs.

The main purpose of costing system are ascertainment of cost, fixation of the selling price, proper recording and presentation of cost data to management for measuring efficiency and for cost control and cost reduction, ascertaining the profit of each activity, assisting management in the decision making process.