Normal activity definition

What is Normal Activity?

Normal activity is the average level of production volume for an extended period of time that incorporates short-term fluctuations. This activity level is used as the basis for a calculation of the standard factory overhead rate, which is then applied to units produced. It can be difficult to arrive at a normal activity level in situations where the level of customer demand varies in an unpredictable manner. Consequently, a business with seasonal sales might not be able to derive a level of normal activity.

Related AccountingTools Course

Cost Accounting Fundamentals

FAQs

How Does Normal Activity Affect Product Costing?

Normal activity provides a stable base for allocating fixed overhead costs across units, resulting in more consistent product costing over time. By averaging out seasonal or short-term production fluctuations, it prevents cost distortions that can occur during periods of unusually high or low output. This leads to more reliable pricing, budgeting, and performance evaluations.

Related Articles

Cost Allocation Methods

Manufacturing Overhead Rate

Overhead Allocation

Overhead Application

The Underabsorption and Overabsorption of Overhead

Volume-Based Allocation