What is Normal Costing?

Normal costing is used to derive the cost of a product. This approach applies actual direct costs to a product, as well as a standard overhead rate. 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).

What is Standard Costing?

Standard costing is the practice of substituting an expected cost for an actual cost in the accounting records. Subsequently, variances are recorded to show the difference between the expected and actual costs. Standard costing involves the creation of estimated (i.e., standard) costs for some or all activities within a company. The core reason for using standard costs is that there are a number of applications where it is too time-consuming to collect actual costs, so standard costs are used as a close approximation to actual costs. This results in significant accounting efficiencies.

Comparing Normal Costing and Standard Costing

The key difference between normal costing and standard costing is that normal costing employs actual costs for materials and direct labor, while standard costing uses predetermined costs for both of these items. These differences can result in significant variations between the methods in the costs applied to inventory and the cost of goods sold, if the standards used differ markedly from actual costs.