Extended Normal Costing

Extended normal costing is a costing method used to track production costs. Costing methods determine the money needed to produce output for a given business. Extended normal costing determines the cost of production using budgeted costs of the inputs used in production multiplied by the actual quantity of the inputs that were used in production. The budgeted costs of production are predetermined by a firm's management, typically at the beginning of the year. Extended normal costing uses these budgeted input costs instead of the actual costs of production.

Extended normal costing differs from normal costing and actual costing in that it solely uses budgeted costs. Actual costing uses all the actual costs that were incurred in the production of a product or service. Normal costing uses actual costs of direct materials and direct labor but uses a budgeted figure for overhead costs. The advantage of extended normal costing estimates is that they are more timely than actual or normal costing figures because input costs are predetermined and do not need to be calculated to develop a total cost estimate.

The disadvantage of extended normal costing is that the cost figures will likely be inaccurate, since they were determined in advance of actual production, and actual costs may change over time. However, in cases where it is very difficult to track all the costs going into a product, extended normal costing may be the most effective way to assign production costs. Extended normal costing is commonly used in industries where input costs are difficult to determine, such as the service sector.

Susan is the Chief Executive Officer of Charming Chairs, a manufacturer of chairs. Susan must determine an estimate of the cost of producing a Charming Chairs chair. At the start of the year, the management team of Charming Chairs budgeted costs of $100 for direct labor, $40 for direct materials and $10 for overhead per chair produced. Thus, Susan determines that the extended normal cost of producing one chair is $150 ($100 + $40 + $10).