What is Extended Normal Costing?

Extended normal costing derives production costs by multiplying budgeted or standard costs by the number of actual units produced. This approach differs from normal costing, where the actual costs of direct materials and direct labor are assigned to the actual number of units produced.

Advantages of Extended Normal Costing

There are several advantages to using extended normal costing, which are as follows:

When actual cost assignment is difficult. This approach is used when it is difficult to assign actual costs to products. In these situations, using budgeted or standard costs is better than using no information at all, where management would otherwise have no basis of information on which to make decisions.
Balances accuracy with practicality. The method integrates actual direct costs (like direct materials and labor) with estimated indirect costs, combining the strengths of actual costing and standard costing. This hybrid approach balances accuracy with practicality.

Disadvantages of Extended Normal Costing

Since the extended method employs more estimates, the costing information it produces is less accurate than the normal costing method. This can result in incorrect information being given to management, especially when standard costs differ substantially from actual costs. The result can be incorrect decisions by management, since they are based on incorrect costing information.