Actual costing
Actual costing assigns direct materials and direct labour at actual quantities and prices, applying overhead at the actual rate determined only once the period closes; it avoids predetermined-rate errors but unit costs fluctuate with.
FrameworkProduct costing systems
See it move
Under actual costing, direct materials and direct labour are charged at the real quantities and prices as work happens, but overhead can only be applied once the period ends and both actual overhead and actual volume are known. A busy month spreads overhead over more units and reports a lower unit cost than a quiet month, even with identical efficiency.
The formula
Variables
- Actual overhead rate per allocation base unit; determinable only once the period closes (€ per allocation base unit)
- Actual total manufacturing overhead incurred during the period (€)
- Actual total volume of the allocation base used during the period (e.g. direct-labour hours, machine hours) (allocation base units)
Product cost = actual DM + actual DL + (r_actual × allocation base units consumed by that product); the period must close before any job can be fully costed.
Check yourself
A specialist engineering firm uses actual costing for its job cost system. Which of the following most accurately identifies the key operational disadvantage of this approach compared with normal costing?