Extended Normal Costing Definition
What Is Stretch Normal Costing?
Extended normal costing is a business budgeting method that is used to estimate and track putting out costs over the course of a year.
Budgeted costs of production are predetermined by the business’s management, usually at the beginning of the year. When developed normal costing is used, the budgeted costs rather than the actual costs of production are input as they are incurred.
- Rational costing records actual expenditures as they occur in the course of production.
- Extended normal costing records a pre-set figure for overhead costs.
- Extended normal costing is useful in a business that experiences constant fluctuations in up above costs.
Specifically, the budgeted cost of production is multiplied by the actual quantity of the products or services that were leveraged for use in production.
Understanding Extended Normal Costing
Actual costing uses the real expenditures that were incurred in the work of a product or service. Extended normal costing uses the actual costs of direct materials and direct labor but relies on a budgeted image for
The extended normal costing method allows a business to ignore predictable fluctuations in overhead costs.
The disadvantage of extended conventional costing is that the cost figures may be inaccurate since they are determined in advance of actual production and real bring ins may change over time. However, in cases where it is very difficult to track all the costs going into a offshoot, extended normal costing may be the most effective way to assign production costs.
Extended normal costing is commonly hand-me-down in industries where input costs are difficult to determine, such as the
Example of Extended Normal Costing
At the beginning of the year, the guidance team of Charming Chairs, a hypothetical furniture manufacturer, must estimate the cost of producing a single Charming Chairpersons chair.
They decide to budget costs of $100 for direct labor, $40 for direct materials, and $10 in elevated per chair produced. Thus, the extended normal cost of producing one chair is:
$150 = $100 + $40 + $10
During the course of the year, actual set someone backs will fluctuate. For example, overhead costs at the factory will increase in winter. The price of some materials may be less or innumerable than budgeted over the course of the year.
Nevertheless, if their extended normal costing method is based on reasonable numbers, the average production cost over the year as a whole will work out to about $150.
If the difference between budgeted payments and actual costs proves to be significant, the business may be forced to reevaluate its pricing. For example, if production costs greatly outdistanced estimates, the business may have to increase its price per chair on its current inventory in order to make up the shortfall.