We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Accounting

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is a Normal Cost?

By Osmand Vitez
Updated: May 16, 2024

Normal cost, also known as standard cost, is a management accounting term relating to the estimated or predetermined cost of producing a good or service. Many companies use normal cost figures in their management accounting processes. This figure typically represents how much a company would pay to produce goods or services under normal operating conditions. Companies can also use this figure as part of their budgeting or performance analysis functions.

Manufacturing and production companies are the primary users of cost accounting. Cost accounting is the specific management accounting function, meaning that companies allocate business costs to goods and services. The normal cost is usually made up of three particular items: raw materials, labor and manufacturing overhead. Raw materials are the economic resources companies use to manufacture consumer goods. Labor represents the individuals who transform raw materials into consumer goods. Manufacturing overhead includes a variety of costs directly attributable to goods or services. Equipment depreciation, building rent, utilities to run manufacturing facilities and wages for production supervisor are a few examples of manufacturing overhead.

The normal cost is often the goal or objective manufacturing and production companies wish to achieve when producing goods or services. This figure is usually compiled from extensive historical data relating to a company’s production process. Management accounting usually keeps copious records relating to how much companies spend when producing goods or services. Business owners can use this information to discover trends in their company’s production facilities. The development of a normal cost can also help companies create a production variance analysis. This helps business owners determine why the company spent more or less money when producing goods or services under current economic conditions.

Manufacturing and production companies rarely achieve their normal cost goals. Several different factors may cause these companies to miss their production cost goals. High cost economic resources, decreases in production output and supply of labor can create difficult cost management situations. Business owners and managers often conduct an in-depth analysis to determine which specific factors had the most impact on the company’s production process.

Companies can also create production budgets based on their production process’ normal cost. These budgets form a financial road map business owners and managers use to estimate future financial expenditures. Management accountants can also maintain several years’ worth of production budgets to form a trend analysis for budgeting purposes. This allows owners to refine and assess their production budget process and create the most efficient production operations for their company.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
By SteamLouis — On Jul 11, 2011

@anamur-- That's why in Operations Management class, they teach us to document every transaction!

We were taught pretty much the same things about normal cost as mentioned here. The only difference is that we are asked to account for time as well. In management, normal cost is the cost of doing an activity in normal time. And normal time is the time period in which we expect the job to be completed.

It's basically the same concept, just with the inclusion of time. Time is as valuable as money in many transactions and projects. So it can also be included in normal cost.

By serenesurface — On Jul 11, 2011

I think I understand this now. Normal cost is the cost that the manufacturer is expecting, right? It expects a certain cost from producing a good and is prepared for that. If there is a cost that is not normal- meaning a cost that the manufacturer wasn't expecting- then it means that there is something wrong.

Then, the company has to go back and look through all of their operations and purchases to see where the extra cost came from. They have to resolve that so that it doesn't happen again.

Great! I really needed to figure this out for my assignment. Thanks for the info!

By turquoise — On Jul 10, 2011

Does normal cost affect the price of goods? If a manufacturer is not able to produce a good at normal cost and ends up spending more, will it increase the price of that good to make up for the difference?

Or do the prices remain the same and that additional cost is a loss for the manufacturer?

Can anyone clarify how this works?

Share
https://www.smartcapitalmind.com/what-is-a-normal-cost.htm
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.