Actual Costing
What is Actual Costing?
Actual costing refers to the process of using actual costs to calculate cost of inventory.
![ac 1](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-1.jpg)
How it Works
A manufacturer may have a client who is interested in buying a certain amount of a product.
![ac 2](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-2.jpg)
The manufacturer will need to determine a selling price for these goods.
![ac 3](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-3.jpg)
To do this, the manufacturer will set out a budget.
![ac 4](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-4.jpg)
This will include an estimate for likely material costs.
![ac 5](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-5.jpg)
It will estimate likely direct labor costs.
![ac 6](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-6.jpg)
Finally, it will include overhead costs such as utility costs, administration, and machine setup & maintenance.
![ac 7](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-7.jpg)
From all of these estimated costs, the manufacture will determine a unit cost price.
![ac 8](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-8.jpg)
Based on this, it will set a selling price.
![ac 9](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-9.jpg)
If the client agrees to the price, the manufacturer will go ahead and make the product.
![ac 10](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-10.jpg)
Problem is things don’t always go according to plan.
![ac 11](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-11.jpg)
This means the eventual cost price could be quite different to the budgeted price.
![ac 12](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-12.jpg)
To review performance, the manufacturer may require an actual costing.
![ac 13](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-13.jpg)
Here, it needs to find the actual cost of inputs.
![ac 14](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-14.jpg)
Then the manufacturer compare this to the budgeting revenue outcome.
![ac 15](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-15.jpg)
This way, it can amend their pricing and processes to get a better result next time.
![ac 16](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-16.jpg)
Calculating Actual Costs
To calculate actual costs, the manufacturer will break the costs down into actual direct costs and actual indirect costs.
![ac 17](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-17.jpg)
Calculating Actual Direct Costs
Actual direct costs relate to direct material and direct labor costs
![ac 18](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-18.jpg)
To calculate actual direct costs, you multiply the actual cost rate by the actual quantity used.
![ac 19](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-19.jpg)
For example, you would apply this formula to direct materials.
![ac 20](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-20.jpg)
Here, you multiply a unit cost of materials by the amount of materials used in the manufacturing process.
![ac 21](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-21.jpg)
This gives a value for that component of costs.
![ac 22](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-22.jpg)
It works the same way with direct labor.
![ac 23](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-23.jpg)
You take employee pay rate per hour and multiply it by the number of hours needed to produce the goods.
![ac 24](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-24.jpg)
As with direct materials, the formula provides a value for the labor component, as well.
![ac 25](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-25.jpg)
Calculating Actual Indirect Costs
Actual indirect costs relates to manufacturing overheads.
![ac 26](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-26.jpg)
Calculating them works differently to calculating direct costs.
![ac 27.3](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-27.3-1.jpg)
Manufacturers use a formula to calculate these costs, as well.
![ac 28.2](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-28.2.jpg)
Allocated indirect cost rates are an estimation based on something like machine hours required to produce goods.
![ac 29.1](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-29.1.jpg)
They are a factory-wide costing, determined in a previous accounting period.
![ac 30.1](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-30.1.jpg)
To calculate them, you find total cost of overheads for the entire factory for a period.
![ac 31.1](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-31.1.jpg)
Then you divide this by the total number of machine hours used for the period.
![ac 32.1](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-32.1.jpg)
This gives a factory-wide rate for indirect overheads of so much per machine hour used.
![ac 33.1](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-33.1.jpg)
Manufactures take this amount and apply it to the product being costed.
![ac 34.1](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-34.1.jpg)
This provides an amount for actual indirect costs.
![ac 35.1](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-35.1.jpg)
After this, they add all costs.
![ac 36.1](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-36.1.jpg)
This provides a total for actual costs.
![ac 37.1](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-37.1.jpg)
Finally, you divide this total by total number of units produced to show the cost per unit.
![ac 38.1](https://seeaccountingnow.online/wp-content/uploads/2021/09/ac-38.1.jpg)