Normal costing is a method of costing that is used in the derivation of cost. The components used for the normal costing to derive the cost are actual costs of material, actual costs of labor and standard overhead rate that are used for allocation purpose. Since the normal costing makes use of standard overhead rates instead of actual overhead rates, this method is used in determining the product costs where there is no sudden increase in the costs. This method of normal costing is also generally accepted, and it is allowed to derive the cost of product using this technique under GAAP and IFRS.
The technical variation in the normal costing and the standard costing is the use of costs for the costing purposes. In normal costing, usually the actual data is used in order to derive the cost for a product with the exception of manufacturing overhead rate, whereas in standard costing, the costs used are all predetermined i.e. budgeted costs. This variation is what makes standard costing distinguished to the normal cost.
Although no rules apply in the management accounting, it is a common practice to use the like terms when calculating a figure. Therefore, companies will always use a figure of similar nature in both numerator and denominator when calculating the costs.
It is a general rule that in the calculation of actual overhead rate, actual overheads will be divided with the actual quantity and not with the budgeted quantity. The vice versa also applies. The reason for this rule is simple as this provides more authentic results as you are comparing the like terms. However, contradictory as the may sounds, these rules do not apply in normal costing as in this method, the budgeted manufacturing overhead rate is multiplied with the actual quantity to derive the actual overhead costs. The reason for this is that it provides for the more authentic allocation base, and the overheads are allocated properly this way.
The overhead rate is the only figure that is budgeted in this method. To determine the material and labor costs, the actual figures are used. The same goes with the quantity of allocation.