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
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