Normal Historical Costing

Normal historical costing is costing method that uses historical costs for direct material and direct labor, but overhead is charged, or applied to the inventory using a predetermined overhead rate per activity measure. The activity measures typically include direct labor hours, or direct labor costs. The factory overhead amount charged to the inventory is determined by multiplying the predetermined rate by the actual quantity of the activity measure. The difference between these costs (applied overhead costs and the actual overhead costs) is known as overhead variance.

The normal historical cost considers all financial statement items be based on original cost or acquisition cost. It assesses the value used in accounting in which the cost of an asset on the balance sheet is based on its nominal or original cost when acquired by the company. The normal historical costing method is used for assets, under generally accepted accounting principals (GAAP). However normal historical cost accounting is an approach to accounting using asset values based on the real amount on currency paid for assets with no increase amendment. This method uses the accounting principle of historical cost. This approach contrasts with approaches such as current cost accounting. 

The accounting standards are largely based on historical cost accounting but there are exceptions such as the use of reasonable value, net feasible value, and other revaluations. One of the advantages of using historical cost is that it is based on objective evidence rather than subjective opinion. The problem with some non-current assets such as property is that they usually increase in value over a number of years.

The use of this cost can be challenging in the periods of high price rises. The arrangement of the business is not practically presented if the asset has a lower assessment than its current cost. The reason is that the historical cost does not identify unrealized investment gains of a non-current asset

Questions

• What is a normal historical cost?
• How is the normal historical cost accounted in a business?