Question

Sarah is opening a nail salon and is setting up their accounting system. They are deciding if it would be better to use normal or actual costing. What important factors would Sarah consider when deciding which costing system to use?

Answer 1

Sarah must consider the consistency and predictability of her fixed and variable costs, the level of detail and accuracy required for her business operations, and the simplicity of the costing system when deciding between normal and actual costing for her nail salon.

Step-by-step explanation:

When Sarah is considering whether to use normal costing or actual costing for her nail salon, several important factors must be taken into account. Normal costing involves using predetermined indirect cost rates to assign overhead costs, while actual costing assigns actual costs directly as they are incurred.

Sarah will need to evaluate the consistency and predictability of her costs. For instance, if her fixed costs for space and equipment are stable and her variable costs, such as the wage rates for nail technicians, are also predictable, normal costing might be more efficient and provide quicker cost figures for managerial decisions.

However, if Sarah's costs are variable and more difficult to predict, actual costing can provide a more accurate picture of the expenses associated with her nail salon business. Accuracy in costing is vital for Sarah's understanding of her business profitability and for making informed pricing decisions.

In addition to the type of costs, the simplicity of the costing system and the level of detail needed for Sarah's specific business operations are also critical factors in this decision.