Get to know the vital terms of Logistics and Supply Chain Management.
Actual costing is a method of working out the exact expense of making a product after the product has been completed. Contrary to the concept of direct cost control where the costs are forecasted and estimated before the product is made and sold, this actual cost control sums the total costs of making products by determining actual costs of materials used, cost of labor, as well as overhead costs.
How Actual Costing Works?
Track Everything: Each cost incurred in the course of the production process is documented in a very detailed manner. This involves the cost of the inputs, cost of labor, and other expenses that are incurred directly that relate to the production process.
Assign Overhead: Other overhead costs such as rent, bills, and depreciation on the equipment are reallocated in proportion to the amount used in the process of production.
Calculate Total: When all expenses are recorded and overhead has been apportioned, the total cost is arrived at by summing up material cost, labor cost, and overhead cost.
Advantages of Actual Costing
Super Accurate: Actual costing offers the actual figure of the cost, which has been incurred in the production of the product, and gives the true picture of the amount that was spent.
Detailed Insight: It provides detailed information on production cost which is very useful in preparing financial statements and decision making.
Disadvantages of Actual Costing
Time-Consuming: This is because actual costing requires a detailed accounting of each expense hence, can be very tiresome and resourceful.
Costly To Implement: The very process of keeping track of, and summing every penny amounting to an expense creates additional costs, particularly for greater operations.
Since costs are only measured after a production has taken place you will only be able to establish the cost once the final product is complete.
In a Nutshell
Actual costing provides a perfect way of establishing the cost of production of certain products. It offers very accurate data to control costs; it is suitable for industries that require elaborate cost controllers. Yet, it is not the quickest or cheapest way to go about it as a lot of time and effort would be invested in making it work.
