Extended Normal Costing

Costing method that assigns direct costs to cost objects using budgeted rates and actual quantities of inputs. It assigns overhead based on budgeted rates and the actual quantity of the base used for cost assignment. This approach is prevalent in the service sector. Accordingly, overhead is assigned under normal costing to each job through a predetermined overhead rate equal to the budgeted overhead divided by the budgeted amount of the appropriate denominator measure. In a traditional system, a single overhead rate might be established for an entire department, e.g., $3 of overhead for every direct labor-hour. If ABC is used, however, the multiple activities that use resources classified as overhead will be identified, a cost pool will be established for each activity, and the costs in each pool will be assigned based on the driver specific to the activity. If a driver cannot be easily identified, overhead is assigned to products or services using an allocation procedure; that is, it is determined using some indirect measure.