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All costs associated with production are treated as product costs, including direct materials, direct labor, and fixed and variable manufacturing overhead. GAAP, all nonmanufacturing costs (selling and administrative costs) are treated as period costs because they are expensed on the income statement in the period in which they are incurred.

Generally Accepted Accounting Principles (U.S. In Chapter 2 "How Is Job Costing Used to Track Production Costs?", we discussed how to report manufacturing costs and nonmanufacturing costs following U.S. Understand how managers use variable costing to make decisions.

The accuracy level of normal costs is between actual costs and standard costs. Standard costs are the least usable from a management perspective, since the costs used may not equate to actual costs. Normal costing varies from standard costing, in that standard costing uses entirely predetermined costs for all aspects of a product, while normal costing uses actual costs for the materials and labor components.įor a more accurate view of the direction in which product costs are headed, it is better to use actual costs, since they match the current amount of actual overhead costs. It is acceptable under the generally accepted accounting principles and international financial reporting standards accounting frameworks to use normal costing to derive the cost of a product for financial reporting purposes. Normal costing is designed to yield product costs that do not contain the sudden cost spikes that can occur when actual overhead costs are used instead, it uses a smoother long-term estimated overhead rate.

If there is a difference between the standard overhead cost and the actual overhead cost, you can either charge the difference to the cost of goods sold (for smaller variances) or prorate the difference between the cost of goods sold and inventory. It includes the actual cost of materials, the actual cost of labor, and a standard overhead rate that is applied using the product's actual usage of whatever allocation base is being used (such as direct labor hours or machine time). This approach applies actual direct costs to a product, as well as a standard overhead rate. Normal costing is used to derive the cost of a product.