Normal Absorption Costing

Method of product costing. It includes actual costs of direct material and direct labor plus factory overhead applied by using predetermined overhead rates times actual units of inputs (such as direct labor hours, machine hours, direct material dollars, or direct labor cost). This method smoothes fluctuations in overhead costs that occur during the year. It also provides timely costing information that would not be available if the firm waited until year-end to determine the actual rates. See also Extended Normal Costing.