Wize University Managerial Accounting Textbook > Alternative Costing Methods
Normal-Absorption Costing
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Normal-Absorption Costing
Also called Normal costing, this costing method follows the same rules as absorption costing, with the only difference being that under normal-costing, applied fixed manufacturing overhead is used instead of actual.
Volume Variance
Since the number of budgeted units in a period and the actual number of units produced can defer, cost of goods sold must be adjusted at the end of the period, the adjustment is called the volume variance.
- If Units Produced > Budgeted Units: The volume variance is favourable, which means costs were overestimated. The volume variance is negative and is subtracted from COGS.
- If Units Produced < Budgeted Units: The volume variance is unfavourable, which means costs were underestimated. The volume variance is positive and is added to COGS.
Normal Costing Income Statement
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Example: Normal-Absorption Costing
ABC Inc manufactures scientific calculators primarily used by high school students. On a typical month, the company will produce 220,000 units, however in May 2020, the company produced 200,000 units, and sold 187,000 at a price of $20 per unit. The costs incurred are as follows:
Direct Materials: $100,000
Direct Labour: $120,000
Variable Manufacturing Overhead: $140,000
Fixed Manufacturing Overhead: $300,000
Variable Selling & Administrative Costs: $20,000
Fixed Selling & Administrative Costs: $90,000
Prepare an income statement using normal costing
Practice: Normal-Absorption Costing
Washburn Coolers manufactures and sells one product. The following information pertains to each of the company's first three years of operations.
This year, Washburn Coolers produced 40,000 units and sold 28,000. Budgeted volume for the year was 50,000. The company sells its product for $100 per unit.
What is the company's net income in 2020 using normal costing?