Actual cost implies the total amount spent in acquiring an asset. This includes several important factors such as labor costs, delivery charges, and any such direct expenses.
Actual costing contains the actual cost of products and overhead charges to estimate the cost of production.
This method is highly recommended when each process of production is analyzed to determine the production costs at each phase.
Calculation of actual costs
- Number of units of material used X Per unit cost = Actual material cost
- Labor hours used in production X Wage paid per hour = Actual labor cost
- Addition of all overhead expenses (electricity, rent, insurance ) = Actual overhead cost
- (A+B+C) / Number of units produced = Actual production cost per unit
Benefits of actual costing
- Helps to calculate fixed costs for different stages of production.
- It is widely used in manufacturing sectors where more number of raw materials are utilized. It also enhances the inventory system and makes procurement easy.
- It assists in taking several outsourcing decisions and also helps in setting up the right prices for the products.
- It helps in streamlining procurement as it depicts the cost of all alternative sources of supply and helps in choosing the most feasible option.
Actual cost uses realistic numbers to ascertain the prices and helps decision making an easy task. Though the disadvantage lies in the fact that the overhead expenses can never be exact.
Even the labor charges is a varying factor which makes it challenging to use this technique in comparison to normal costing. Also, this is useful in industries where the raw materials and other related factors are consistent with very fewer changes. It is ideal for standardized products. Also, the process is time-consuming with a need for several technical skills.
Get more definitions about Actual cost and other ERP related terms here.