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4 ACTUAL COSTING AND NORMAL

COSTING

INTRODUCTION

This topic covers the de nition of Actual Costing and Normal

Costing, differences between Actual Costing and Normal
Costing, Actual Overhead, Applied Overhead and Budgeted
Overhead, calculate Predetermined Overhead Rate (POR)
in Activity-Based Costing (ABC) and calculate applied
manufacturing overhead cost for every basis of
predetermined overhead rate.
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4.1 ACTUAL COSTING AND NORMAL COSTING

De nition

Actual Costing System Normal Costing System

Actual Costing System are Normal Costing System uses actual

considered the actual cost of direct costs of direct materials and direct labour
materials and direct labour involved and applied manufacturing overheads to
and actual manufacturing overhead numerous jobs supported at a
cost applied or allocated to several predetermined overhead rate to avoid
types of jobs. uctuation 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 and Normal Costing

Actual Costing RM Normal Costing RM

Actual Direct materials XXX Actual Direct materials XXX

Actual Direct Labour XXX Actual Direct Labour XXX

Actual Manufacturing XXX Applied Manufacturing XXX

Overhead Overhead

Product cost XXX Product cost XXX

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Difference between Actual Costing and Normal Costing

Actual Costing Normal Costing

Manufacturing cost are based on the Manufacturing cost are based on actual
actual cost of direct materials, actual cost of direct materials, actual cost of
cost of direct labour, and actual direct labour, and applied manufacturing
manufacturing overhead cost overhead cost.

Advantages and disadvantages of using Normal Costing to management

Advantages Disadvantages

i. The company can set the product i. Budgets are often unrealistic if the
pricing earlier or in advance. actual overhead amounts differ
greatly from what was budgeted.
ii. The cost of the product will remain
consistent at a certain period for
ii. Cost information is less accurate
using the same overhead rate.
since the information is based on
estimation. This can result in incorrect
information being given to
management.

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4.2 ACTUAL OVERHEAD, APPLIED OVERHEAD AND BUDGETED OVERHEAD.

Actual overhead Applied overhead Budgeted overhead

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

Example: Syarikat Awal Sdn

Example: telephone, Formula:
Bhd makes an estimation of
electricity, and water
Applied overhead = overhead such as:
bill; the bill amount will
only be known when Predetermined overhead Supervisor salary RM100,000
we received the bills. rate X Actual activity
Plant depreciation RM 7,500
based used
Machine repair RM 25,000

Difference between the actual overhead costs incurred and the cost of applied
overhead : under-applied overhead and over-applied overhead

Applied Overhead > Actual Overhead Over-applied Overhead

Applied Overhead < Actual Overhead Under-applied Overhead

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Predetermined Overhead Rate (POR) used in Activity-Based Costing (ABC)

• Manufacturing overhead costs were absorbed/applied into products using

Predetermined Overhead Rate (POR).

• POR is obtained from the estimated manufacturing overhead costs for a period by
choosing an activity base that will be used to apply the overhead costs for example
direct labour hours, machine hours, and units of production.

• POR used in Activity-Based Costing (ABC) is an approach in which cost is allocated to

the cost product based on resources used in the production activity.

POR formula

Budgeted annual overhead cost

POR =
Budgeted annual operating activity

The choices of budgeted annual operating activities are:

1. Direct labour hours 


2. Direct labour costs 

3. Machine hours 

4. Direct materials cost 

5. Production unit

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Example 1:

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

Solution:

a. RM 500 000
200 000 MH d. RM 500 000 x 100%
RM 400 000
= RM 2.50 / MH
= 125% of DMC

b. RM 500 000
100 000 DLH e. RM 500 000
75 000 unit
= RM 5.00 / DLH
= RM 6.67 / unit

c. RM 500 000 x 100%

RM 650 000
= 76.92% of DLC

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Example 2:

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

Solution:

Applied overhead = Predetermined overhead rate X Actual activity base used

Activity Department X Department Y Department Z

basis

Direct 125% x RM 140,000

materials
= RM 175,000

Direct 76.92% x RM 110,000

Labour Cost
= RM 84,612

Machine RM 2.50 x 10,400 hrs.

Hours
= RM 26,000

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Example 3:

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

Solution:

Step 1: Determine POR

Direct Labour Costs = RM1,200,000

RM 2,000,000

= 60%

Direct Labour Hours = RM1,200,000

180,000 Hours

= RM 6.67/ Hours

Machine Hours = RM1,200,000

200,000 Hours

= RM 6.00/Hours

= RM1,152,000

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Step 2: Calculate Applied Manufacturing Overhead

Direct Labour Cost = 60% x RM2,100,000

= RM1,260,000

Direct Labour Hours = RM6.67 X RM190,000

= RM1,267,300

Machine Hours = RM6.00 X RM192,000

= RM1,152,000

Basis Activities Applied Overhead Actual Overhead Over/ under-applied

Direct Labour RM 1,260,000 RM 1,180,000 RM80,000

Costs
Over-applied

Direct Labour RM 1,267,300 RM 1,180,000 RM87,300

Hours
Over-applied

Machine Hours RM 1,152,000 RM 1,180,000 RM28,000

Under-applied

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