Judith, an undergraduate, enrolled in a Cost Accounting course is cramming for her final examination and is having difficulties understanding the many variations in cost accounting systems. Her cost accounting textbook uses the following terms: actual costing, normal costing and standard costing. She cannot understand why the first chapter of her textbook states that the purpose of the costing system is to calculate the cost of production, and yet the normal and standard costing systems use budgeted cost figures that have not actually been incurred. She wants to know why budgeted figures are used instead of historical cost figures in the normal and standard costing systems.

Required:

Clarify the role of actual costing, normal costing and standard costing systems in an organisation for Judith. In doing so you may consider the following questions:

1. Are costing systems designed to provide cost information only? Explain.
2. Explain how actual costing, normal costing and standard costing systems treat direct material, direct labour and overhead costs.
3. To what extent do the actual costing, normal costing and standard costing systems go beyond merely providing cost information, and assist management manage operations?