Most companies use one of two methods for measuring costs.

a. Actual costing bases unit costs on actual costs incurred for direct materials, direct labor, and manufacturing overhead.

b. Normal costing bases unit costs on actual costs incurred for direct materials and direct labor and an estimate of manufacturing overhead.

c. Estimated overhead costs are the product of the actual activity base multiplied by the predetermined overhead rate.

(1) At the end of the accounting period, the company adjusts the manufacturing overhead account as necessary to make the estimated overhead equal the actual overhead.