What is the difference between plan costing and actual costing?

The distinction between plan costing and actual costing is effectively captured in the assertion that plan costing is based on budget while actual costing is based on invoices.

Plan costing refers to the forecasting and budgeting process where estimated costs are determined for different cost elements in a project or account. This estimation is often derived from historical data and is used for planning purposes, influencing strategies, and setting financial goals for an organization. The planned costs provide a financial framework within which the company expects to operate.

On the other hand, actual costing tracks the real costs incurred during the execution of a project or activity, as reflected in received invoices and actual expenditures. This method provides an accurate depiction of costs post-completion of the transactions and is essential for financial reporting, performance analysis, and decision-making.

Understanding this distinction is crucial for effective financial management as it allows businesses to compare planned budgets against actual expenditures, facilitating better financial control and variance analysis.