Final answer:
The decision to use normal or actual costing involves considering cost stability, production complexity, operation frequency, and cost tracking precision. Thorough analysis of total cost components and a cost/benefit analysis of the costing methods will also guide this choice.
Step-by-step explanation:
The important factors contributing to the decision to choose between normal costing and actual costing for Tim's woodworking business that specializes in building furniture may be influenced by a variety of factors related to cost measurement and accounting practices.
Normal costing involves the use of predetermined overhead rates to allocate manufacturing overhead to the cost of production, whereas actual costing allocates actual costs directly as they occur. An important aspect of this decision will involve considering the stability of costs, the intricacy of production processes, the frequency of operations, and the level of precision desired in cost tracking.
Breaking down total costs into fixed cost, marginal cost, average total cost, and average variable cost is crucial as each statistic reveals different insights for the firm's cost structure and profitability. For example, the fixed costs of operating Tim's woodworking business, including rent for space and equipment, won't change regardless of production levels, making it easier to estimate these for normal costing purposes.
Also, conducting a cost/benefit analysis using marginal costs and benefits can aid the decision-making process. Tim will have to evaluate the predictability of his costs and the benefits of the costing method to choose the most appropriate one for his business.