Final answer:
The difference between an actual and a normal cost system is in the method of recording costs; actual costs are recorded as incurred, while normal costs use an averaging method. This is crucial for determining accounting profit and economic profit, which respectively consider explicit costs and both explicit and implicit costs.
Step-by-step explanation:
The difference between an actual and a normal cost system is how costs are recorded. An actual cost system records costs as they are actually incurred, while a normal cost system records costs by averaging them over a specific period.
This is an important concept in the field of accounting and is related to the determination of accounting profit and economic profit. Accounting profit is calculated by deducting explicit costs from total revenue, and it reflects a cash concept.
Conversely, economic profit takes into account both explicit and implicit costs when subtracting from the total revenue. Understanding these differences helps businesses in accurately reporting financial performance and assessing business health.
This includes both direct costs (such as raw materials and labor) and indirect costs (such as factory overhead). On the other hand, in a normal cost system, costs are recorded based on predetermined standards or estimates. These standards are set in advance and used to assign costs to products or services.