Actual Costing
What is the meaning of actual cost?
In an actual costing system, no predetermined or estimated or standard costs are used. Instead, the actual direct labor and materials costs and the actual manufacturing overhead costs are allocated to the units produced. The cost of a unit is the actual direct cost rates per unit of input multiplied by the actual quantities of the direct cost inputs used and the actual indirect (overhead) cost rates multiplied by the actual quantities
used of the cost allocation bases.
Actual costing is practical only for job order costing for the same reasons that normal costing is practical only for job order costing. In addition, actual costing is seldom used because it can produce costs per unit that fluctuate significantly. This fluctuation in costs can lead to errors in management decisions such as pricing of the product, decisions about adding or dropping product lines, and performance evaluations.
Benefits of Actual Costing
• The primary benefit of using actual costing is that the costs used are actual costs, not estimated costs.
Limitations of Actual Costing
- Because actual costs must be computed and applied, information is not available as quickly after the end of a period as it is with standard costing.
- Actual costing leads to fluctuations in job costs because the amount of actual overhead incurred fluctuates throughout the year.
- Like normal costing, actual costing is not appropriate for process costing because the actual costs would be too difficult to trace to individual units produced. Therefore, it is used primarily in a job costing environment.