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What Is Extended Normal Costing

Extended normal costing is a budgeting method used to estimate production costs over a year. It uses actual costs for direct materials and labor, but predetermined budgeted figures for overhead costs. This allows businesses with fluctuating overhead costs to ignore variations and simplify cost tracking. However, predetermined costs may not match actual costs. Extended normal costing is often used when production costs are hard to determine precisely.

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66 views2 pages

What Is Extended Normal Costing

Extended normal costing is a budgeting method used to estimate production costs over a year. It uses actual costs for direct materials and labor, but predetermined budgeted figures for overhead costs. This allows businesses with fluctuating overhead costs to ignore variations and simplify cost tracking. However, predetermined costs may not match actual costs. Extended normal costing is often used when production costs are hard to determine precisely.

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drin files
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© © All Rights Reserved
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What Is Extended Normal Costing?

Extended normal costing is a business budgeting method that is used to


estimate and track production 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 extended normal
costing is used, the budgeted costs rather than the actual costs of production
are input as they are incurred.

KEY TAKEAWAYS
● Normal costing records actual expenditures as they occur in the course
of production.
● Extended normal costing records a predetermined figure for overhead
costs.
● Extended normal costing is useful in a business that experiences
constant fluctuations in overhead costs.
Specifically, the budgeted cost of production is multiplied by the actual
quantity of the products or services that were purchased for use in production.

Understanding Extended Normal Costing


Actual costing uses the real expenditures that were incurred in the production
of a product or service. Extended normal costing uses the actual costs of
direct materials and direct labor but relies on a budgeted figure for overhead
costs.

That is, extended normal costing figures are predetermined and do not need
to be calculated to develop a total cost estimate.

The extended normal costing method allows a business to ignore predictable


fluctuations in overhead costs.

The disadvantage of extended normal costing is that the cost figures may be
inaccurate since they are determined in advance of actual production and real
costs may change over time. However, in cases where it is very difficult to
track all the costs going into a product, extended normal costing may be the
most effective way to assign production costs.

Extended normal costing is commonly used in industries where input costs


are difficult to determine, such as the service sector. These are sectors that
typically have variable overhead costs. Such costs may include indirect
materials prices, indirect labor costs, utilities, and depreciation expenses.

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