Chapter 04

Actual Costing
&

Normal Costing
 4.1 Actual Costing and Normal Costing
Actual Costing
Actual Costing System are
considered the actual cost of
direct materials and direct
labour involved and actual
manufacturing overhead cost
applied or allocated to
several types of jobs.
Normal Costing
Normal Costing System uses
actual costs of direct materials
and direct labour and applied
manufacturing overheads to
numerous jobs supported at a
predetermined overhead rate
to avoid fluctuation problems of
cost per unit output in every
period that's caused by
multiple volumes of production
units in a certain period.
 Component of Actual Costing & Normal Costing
Actual Costing Normal Costing

Actual Direct Materials Actual Direct Materials

+ +
Cost
Actual Direct Labour Product Actual Direct Labour

+ +
Actual Manufacturing Applied Manufacturing
Overhead Overhead
Diffrerenc
e
Advantages and Disadvantages of Using Normal Costing to Managemet
Advantages Disadvantages

N Budgets are often

The company can set O unrealistic if the actual
R
the product pricing M overhead amounts
earlier or in advance. A
differ greatly from what
L
was budgeted.
C
O
S
T
I
N
G
The cost of the product Cost information is less
will remain consistent at accurate since the
a certain period for information is based on
using the same estimation. This can result in
overhead rate. incorrect information being
given to management.
4.2 Actual Overhead, Applied Overhead and Budgeted Overhead

Actual Overhead Applied Overhead Budgeted Overhead

Refers to the actual amount Is calculated of overhead cost Refers to planned or scheduled
of indirect manufacturing allocated to a specific job manufacturing overhead costs,
costs incurred in a certain estimation based on actual actual manufacturing overhead cost
period activity base. is still unknown.

Formula:
Applied overhead = Predetermined
overhead rate X Actual activity based used
Example: telephone, electricity, Example :
and water bill; the bill amount will Estimation Manufacturing Overhead:
only be known when we received Supervisory Salary RM20,000
the bills. Machine maintenance RM30,000
Difference between the actual overhead costs incurred and the cost
of applied overhead : under-applied overhead and over-applied
overhead

Applied
Overhead
> Actual Overhead
Actual Overhead
Applied
Overhead
<
Over-applied
Overhead

Under-applied
Overhead
Predetermined Overhead Rate (POR) used in Activity-Based Costing
(ABC)
Manufacturing overhead POR used in Activity-
costs were Based Costing (ABC) is
absorbed/applied into an approach in which

1
products using
Predetermined
3 cost is allocated to the
cost product based on
Overhead Rate (POR). resources used in the
production activity

POR is obtained from

the estimated
manufacturing overhead
POR formula :
2 costs for a period by
choosing an activity base
that will be used to apply
the overhead costs for
4
POR = Budgeted annual overhead cost
example direct labour Budgeted annual operating activity
hours, machine hours, Machine Production
and units of production. DL Hours DL Cost Hours
DM Cost Unit
01 Example
Syarikat Seri Bayu manufactures two types of products named Din and Don
at the beginning of 2022. Factory managers provide estimated information
such as the following:
Manufacturing overhead RM500,000
Machine hours 200,000 hours
Direct labour hours 100,000 hours
Direct labour cost RM650,000
Direct materials cost RM400,000
Production unit 75,000 units

Required: Calculate the predetermined overhead rate (POR) basis on the of

the following activities:
a. Machine hours
b. Direct labour hours
c. Direct labour cost
d. Direct materials cost
e. Production unit
01 Answer :
d. RM 500 000 x 100%
a. RM 500 000
RM 400 000
200 000 MH
= 125% of DMC
= RM 2.50 / MH

b. RM 500 000 e. RM 500 000

100 000 DLH 75 000 unit

= RM 5.00 / DLH = RM 6.67 / unit

c. RM 500 000 x 100%
RM 650 000

= 76.92% of DLC
02 Example
On September 2022 these are the data found regarding manufacturing cost:
Activity basis Department X Department Y Department Z

Direct materials RM 140,000 RM 126,000 RM 78,000

Direct Labour Cost RM 120,000 RM 110,000 RM 37,500

Manufacturing Overhead RM 98,000 RM 129,000 RM 80,000

Direct Labour Hours 8,000 hours 11,000 hours 3,500 hours

Machine Hours 34,000 hours 45,000 hours 10,400 hours

Each department uses a different basis to determine applied overhead. Department X is based on
125% of direct materials cost, department Y is based on 76.92% of direct labour cost while
department Z is based on RM2.50 per machine hour.

Required:
Calculate the applied overhead for each department
02 Answer :
Applied overhead = Predetermined overhead rate X Actual activity base used

Activity basis Department X Department Y Department Z

Direct materials 125% X RM 140,000

= RM 175,000
Direct Labour Cost 76.92% X RM 110,000
= RM 84,612
Machine Hours RM 2.50 X 10,400 hours
= RM 26,000
03 Example
For 2022, Malim Enterprise estimates manufacturing overhead cost RM 1,200,000.
While actual overhead costs for the year 2022 are RM1,180,000. Basis activities used
are stated as below:

Basis Activities Estimation Actual

Direct Labour Cost RM 2,000,000 RM 2,100,000

Direct Labour Hours 180,000 hours 190,000 hours

Machine Hours 200,000 hours 192,000 hours

Required:
Calculate over-applied or under-applied overhead for each basis
03 Answer :
Step 1: Determine POR = Budgeted annual overhead cost
Budgeted annual operating activity

Basis Activities POR

Direct Labour Cost RM 1,200,000 X 100%

RM 2,000,000
= 60%
Direct Labour RM 1,200,000
Hours 180,000 hours
= RM 6.67 /hours
Machine Hours RM 1,200,000
200,000 hours
= RM 6.00 /hours
 03 Answer :
Step 2: Calculate Applied Manufacturing Overhead

Applied Manufacturing Overhead = Predetermined overhead rate X Actual activity base used

Basis POR Applied Manufacturing

Activities Overhead
Direct Labour RM 1,200,000 X 100%
60% X RM 2,100,000
Cost RM 2,000,000
= RM 1,260,000
= 60%
Direct Labour RM 1,200,000
RM 6.67 X 190,000
Hours 180,000 hours
hours
= RM 6.67 /hours
= RM 1,267,300
Machine RM 1,200,000
RM 6.00 X 192,000
Hours 200,000 hours
hours
= RM 6.00 /hours
= RM 1,152,000
 03 Answer :
Step 3: Calculate over-applied or under-applied overhead
Applied Overhead > Actual Overhead = Over-applied Overhead
Applied Overhead < Actual Overhead = Under-applied Overhead

Basis POR Applied Manufacturing Actual Over/Under -applied

Activities Overhead Overhead Overhead
Direct Labour RM 1,200,000 X 100% 60% X RM 2,100,000 (1,260,000 - 1,180,000)
Cost RM 2,000,000
= RM 1,260,000 RM1,180,000 = RM 80,000
= 60%
Over-applied

Direct Labour RM 1,200,000 RM 6.67 X 190,000 hours (1,267,300 - 1,180,000)

Hours 180,000 hours
= RM 1,267,300 RM1,180,000 = RM 87,300
= RM 6.67 /hours
Over-applied

Machine RM 1,200,000 RM 6.00 X 192,000 hours (1,152,000 - 1,180,000)

Hours 200,000 hours
= RM 1,152,000 RM1,180,000 = RM 28,000
= RM 6.00 /hours
Under-applied