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  • 1.  Normal Costing

    Posted 01-09-2020 11:01 AM
    All, I need some help with the below problem on normal costing, I am not sure what mistake I am making with my calculation when compared to the textbook. The portion highlighted in yellow is per the textbook and in blue is my calculation. Much Appreciate your help.



    Regards
    Saril

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    Saril Kumar
    Westborough MA
    United States
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  • 2.  RE: Normal Costing

    Posted 01-09-2020 11:57 AM
    Under Normal costing, formulas are as below

    Actual vs Normal Costing Systems
    System Direct labor and material Variable and fixed overhead
    Actual AQ x AP AQ x AR
    Normal AQ x AP AQ x SR

    Therefore, Normal costing is calculated as Actual cost * Std rate = 120,000×2.5×2 = 600,000. DM and DL are calculated as AQ * AP.

    Correct me if i am wrong. 

    Regards, 
    Anoop

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    Anoop Paliyath
    Accountant
    Mustafa Sultan Ent
    Ruwi
    Oman
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    Original Message


  • 3.  RE: Normal Costing

    Posted 01-09-2020 12:22 PM
    Still not sure, another textbook has a different answer which is similar logic like mine, attached screenshots, here only rate is used not the DLH, DLH used is actuals.

    image.png
    image.png



    Original Message


  • 4.  RE: Normal Costing

    Posted 01-09-2020 12:01 PM
    Pre-determined overheads are always calculated based on budgeted/planned production. Since we never know what the actual units of production can never be estimated until the period end, using budgeted/planned production units gives the most reasonable basis of overhead allocation.
    However as and when actual units are being produced the actual no: of units is multiplied with the pre-calculated overhead rates in order for the units being produced to be able to absorb the Direct & Indirect costs.

    Hence the PDOHR can be calculated as below:

    As per the table provided for Budgeted production:
    Variable OH rate = 2.5DLH x $0.2 = $5/unit
    Fixed OH rate = 2.5DLH x $0.2 = $0.5/unit​

    As mentioned above , OH is always applied based on the actual no: of units being produced.

    Applied Variable OH = $5/unit (Calculated above) x 120,000 units (Actual no: of units produced) = $ 600,000
    Applied Fixed OH = $0.5/unit x 120,000 units = $ 60,000

    We simply add the direct material and direct labor cost based on actuals since these are directly traceable and easy to be absorbed as and when incurred.

    Therefore DM = $735,000
                    DL = $ 1,134,000
           Applied Variable OH = $ 600,000
           Applied Fixed OH = $ 60,000

    Total cost as per standard/normal costing = $ 2,529,000.

    Also note that standard costing is a requirement as per IFRS & GAAP. ​​

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    Hafiz Mohamed ACCA CMA
    Abu Dhabi
    UAE
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    Original Message


  • 5.  RE: Normal Costing

    Posted 01-10-2020 12:18 AM
    Yes, students should understand the difference among:
    Actual Costing
    Normal Costing 
    Standard Costing 

    BR,
    Murty



    Original Message


  • 6.  RE: Normal Costing

    Posted 01-10-2020 11:08 PM
    Hi Saril

    Fixed OH would always remain fixed over a relevant range of production. ​

    In normal costing a predetermined rate is used , this could be the standard rate.
    However the actual labor hours consumed for producing the actual output is multiplied by the predetermined rate.
    In your example the fixed oh under the normal costing system will be 2.1*0.2*12000 = 50.400

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    Eashwar Seshadri CMA
    Director/Manager
    IBM India Ltd
    Norristown PA
    United States
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    Original Message