Actual Cost

Definition: Actual cost is an accounting term that means the amount of money that was paid to acquire a product or asset. It’s exactly what it sounds like—the actual cost. This cost could be either a historical, past, or present day cost of product. You might be thinking to yourself what other costs are there besides the actual cost of an item.

1. Actual Cost Method
2. Actual Cost To Build A House
3. Actual Costing Vs Normal Costing
4. Actual Cost To Build A House

What Does Actual Cost Mean?

Well keep in mind in managerial accounting, you also have budgeted and forecasted costs. Neither of these costs reflects reality or actual costs most of the time. Management might set a budget to buy a new piece of equipment, but this budget does not always happen. Sometimes companies can get discounts from vendors and other times product prices increase.

Example

I just want to see my actual cost vs actual revenue. Example: Item Profitability Report - list the service/item, then next column is Act. Cost-Act Revenue-($) Diff-(%) Diff. It shows up with 0.00 under all Act Cost items but Act Revenue and Diff show up (Diff is not correct of course). Actual cost definition: the cost of a product based on incurred costs of material and labor required in its. Meaning, pronunciation, translations and examples.

Actual cost also applies to manufacturing products as well. The actual cost of manufacturing a product is the total expenditures required to build or manufacture the product. Think of actual cost as the end result of a manufacturing process.

First, a company starts planning the production and forecasts what the expenses will be. Second, the company budgets what it will be able to afford and adjusted to the production levels to meet the budget. If everything goes according to plan, the actual costs will equal the budgeted costs. In the real world, things can go wrong and budgets are not always met. The end result is the actual cost. It could be plus or minus the budgeted or forecasted cost.

Contents

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.

Actual cost formula

The formula for calculating actual cost is as follows

Actual Cost Method

Actual Cost = Direct Costs + Indirect Costs + Fixed Costs + Variable Costs + Sunken Costs

Below is the meaning of factors used in the formula.

• Direct costs: This is the clear cost that is directly related to your process such as fixed costs and variable costs
• Indirect costs: These costs are additional or extra costs to support your process like administrative charges
• Fixed costs: This is the cost that remains constant throughout the process like rent of the building or rent of an equipment
• Variable costs: This is the cost that varies during the process. For example labor charge.
• Sunken costs: This is the cost that occurs due to the error during the process

If you are manufacturing products, the actual cost will be calculated as follows

1. Number of units of material used X Per unit cost = Actual material cost
2. Labor hours used in production X Wage paid per hour = Actual labor cost
3. Addition of all overhead expenses (electricity, rent, insurance ) = Actual overhead cost
4. (A+B+C) / Number of units produced = Actual production cost per unit

Actual cost example

For example, a manufacturing company estimated $1500 for product repair. But the actual cost was $2000. So the company had a cost variance of $500.

Cost variance is the difference between planned or estimated costs and actual costs

Here the actual cost is more than the estimated cost. Hence the cost variance is considered as an unfavorable variance.

Benefits

1. Helps to calculate fixed costs for different stages of production.
2. It is widely used in manufacturing sectors where more raw materials are utilized. It also enhances the inventory system and makes procurement easy.
3. It assists in taking several outsourcing decisions and also helps in setting up the right prices for the products.
4. It helps in streamlining procurement as it depicts the cost of all alternative sources of supply and helps in choosing the most feasible option.

Actual cost uses realistic numbers to ascertain the prices and helps decision-making an easy task. Though the disadvantage lies in the fact that the overhead expenses can never be exact.

Actual Cost To Build A House

Even the labor charges are a varying factor which makes it challenging to use this technique in comparison to normal costing. Also, this is useful in industries where the raw materials and other related factors are consistent with very fewer changes. It is ideal for standardized products. Also, the process is time-consuming with a need for several technical skills.

Normal costs or regular costs

Normal costs are the cost that is pre-planned. That means you calculate the cost of the product before production based on the previous data.

Actual Costing Vs Normal Costing

Actual Cost To Build A House

What are the differences between Actual costing(AC) and Normal costing (NC)?

1. In normal costing cost is calculated before the production process, in actual costing cost is calculated after the production process.
2. NC includes direct costs and indirect costs, AC includes costs of the production process in real-time. That means AC includes the costs like any variations in labor charge and raw material price.
3. In NC costs update once in a while, but in AC costs of the product updates for each batch after calculating the actual expenses
4. NC assumes the cost of the production, But AC takes the actual expenses of each batch.

What is total fixed cost?

Total fixed cost is the sum of all non-variable costs of a company like rent of office area per month, rent of machines per month, utility costs, etc.

Get more definitions about Actual cost and other ERP related terms here.