Definition:
Actual costing is a method of determining the cost of a product or service by using the actual costs incurred during production. This means that the final cost is calculated based on the actual prices paid for materials, the actual wages paid to labor, and the actual overhead costs incurred.
Key points about actual costing:
- Accuracy: Actual costing provides a highly accurate cost of a product or service, as it is based on actual costs.
- Timeliness: It can be time-consuming to gather and analyze actual costs, especially for complex products or services.
- Variances: Actual costing can help identify variances between budgeted costs and actual costs.
- Decision-making: Actual costing can be used to make informed decisions about pricing, product mix, and resource allocation.
Example:
If a company produces a product with a budgeted cost of $100, but the actual costs incurred are $120, then the actual cost of the product is $120.
In essence, actual costing is a straightforward method of determining the cost of a product or service based on the actual costs incurred. While it provides accurate cost information, it can be time-consuming and may not be suitable for all situations.
