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Actual cost is the total amount of materials, labor costs, and any directly associated overhead costs that can be charged to a specific project. The actual cost is different from the standard cost, although both approaches are often used to evaluate the profitability of a given project. With actual costs, the goal is to break down the specifics of the costs involved with the project and determine if the production process associated with the project is in fact working at optimum efficiency.
Understanding the difference between the standard cost and the actual cost is very important when looking at the expenses associated with a given job or project. The standard cost assumes a standard value and uses that figure to track the usage of resources. This tracking is usually in the form of either hours or the number of units consumed, and can identify variance between the production and consumption. In contrast, the actual cost is concerned only with the costs incurred during the course of the project, and not the units produced.
Determining the actual cost is very important when it comes to judging the profitability of any production process. Knowing how much it actually costs to engage in that production for a specific period, such as a month, makes it easier to compare the revenue that is generated for the same period. If the actual cost was exceeded by the amount of revenue received during the same period, then the company is operating at a profit. If not, this calculation of the actual cost can motivate business owners to take a closer look at each expense involved with the manufacturing process and identify ways to cut costs and increase the chance of becoming profitable.
Comparing the actual cost of production from a given period to previous periods can also help identify situations where the cost of production is increasing for some reason. If this increase proves to be an ongoing trend, looking at each of the factors involved may yield clues as to what is happening. For example, an investigation may uncover the fact that an excessive amount of overtime is the reason for the higher production costs. If this is the case, the business can look closely for the reasons why the overtime took place, and determine if there is any better way to arrange the use of labor to offset this increase. From this perspective, calculating the actual cost is viewed as a valuable tool that helps to keep the production process efficient, thus maximizing the opportunity to generate the highest amount of profits possible from the process.
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