Normal costing uses a predetermined overhead rate and actual costs for direct materials and direct labor. It enables a business to estimate some costs while capturing actual expenses, helping in financial planning and control. In cost accounting, this method is essential for understanding financial performance.
The student asked, "Which of the following statements is true of normal costing?" The correct answer to this question is: Normal costing measures overhead costs on a predetermined basis and uses actual costs for direct materials and direct labor. This means that while the overhead costs are estimated in advance to come up with a rate, the costs for direct materials and direct labor are not estimated, but instead are recorded as they are actually incurred.
When considering alternative measures of costs, breaking down costs into categories like fixed cost, marginal cost, average total cost, and average variable cost can provide valuable insights. Variable costs, such as labor and raw materials, change with the level of output.