DEFINITION of 'Extended Normal Costing'
In managerial accounting, a method of tracking production costs based on an approximation of the prices of the inputs multiplied by the actual quantity of inputs used. In normal costing, the actual prices are used for direct labor and direct materials, and only the overhead rate is estimated. Extended normal costing uses estimates for direct labor and direct material prices as well as overhead.
BREAKING DOWN 'Extended Normal Costing'
Selecting an accurate method of costing is important for maximizing profitability. Since extended normal costing relies heavily on estimates of input prices, it may produce inaccurate results unless estimates are carefully prepared. However, in cases where it is very difficult to track all of the costs going into a product, extended normal costing may be the most effective ways to assign production costs.