Planned cost is the estimated cost of a particular product. It is determined based on historical data of that product before the manufacturing of the particular product. It includes the components like direct raw material charge and direct labor charge.
The 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.
Difference between planned cost(PC) and actual cost(AC)
Before talking about the difference we must know what is actual cost. The actual cost is the amount spent on a product for its production.
- PC determines before the production of a particular product, whereas AC determines after the production of that particular product
- PC calculation includes only direct costs like labor costs and raw material costs, but AC calculation includes direct costs, indirect costs, fixed costs, variable costs, and sunken costs
- PC is an assumption, but AC is the exact amount spent
If the actual cost is less than the planned cost, then it is called favorable variance, If the actual cost is greater, then it is called unfavorable variance.
Get more definitions about Planned cost and other ERP related terms here.