Final answer:
The main difference between normal costing and standard costing is in the application of overhead: normal costing uses actual activity to apply a predetermined overhead rate, while standard costing applies overhead based on standard costs and standard activity levels, resulting in potential variances. 'Spreading the overhead' refers to allocating fixed overhead costs across more units of production, lowering the average fixed cost per unit.
Step-by-step explanation:
The difference between normal costing and standard costing primarily lies in the treatment of overhead costs. Normal costing uses the actual indirect costs incurred and applies them to units produced based on a predetermined overhead rate. Standard costing, on the other hand, employs pre-established costs for materials, labor, and overhead, which are based on benchmark or 'standard' operating conditions.
In normal costing, overhead is applied to products based on the actual amount of the cost driver (like machine hours or labor hours) incurred during the period, using the predetermined overhead rate. This means that normal costing combines actual costs of direct materials and direct labor with an applied overhead rate to determine the cost of production.
With standard costing, however, the focus is on what the costs should be under efficient operating conditions. When using standard costing, companies apply overhead using a standard overhead rate, multiplied by the standard hours allowed for the actual output produced. Consequently, standard costing often results in variances that show the difference between the expected (standard) costs and the actual costs incurred.
Spreading the Overhead
The concept of 'spreading the overhead' refers to the process of allocating overhead costs across the units produced. As output increases, the fixed overhead costs (like rent or salaries) are spread over more units, resulting in a lower average fixed cost per unit. This is illustrated by a downward-sloping average fixed cost curve, where increased production leads to a decrease in the overhead cost per unit.