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.
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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.