What Is Full Costing?

Full costing is an accounting method used to determine the complete end-to-end cost of producing ꧋products or services.

Understanding Full Costing

Also known as "full costs" or "澳洲幸运5官方开奖结果体彩网:absorption costing,” it is required in most common accounting methodologies, including 澳洲幸运5官方开奖结果体彩网:generally accepted accounting principle🔯s (GAAP), 澳洲幸运5官方开奖结果体彩网:International Financial Repor❀😼ting Standards (IFRS♒), a🎃nd reporting standards for income tax purposes.

When using the full costing method, all direct, fixed, and 澳洲幸运5官方开奖结果体彩网:variable overhead costs are assigned to the end product.

• Direct costs: are expenses directly related to the manufacturing process. They can include staff wages, the costs of any raw materials used, and any 澳洲幸运5官方开奖结果体彩网:overhead expenses, such as batteries to run machinery.
• Fixed costs: are primarily overhead expenses, such as salaries and building leases, that remain the same, regardless of how much or how little the company is selling. A company must pay its office rent and wages every month, even if it manufactures nothing.
• Variable overhead costs: are the indirect expenses of operating a business that fluctuates with manufacturing activity. For example, when output rises additional staff may be hired to help out. This scenario would result in the company stomaching higher variable overhead costs.

In full costing accounting, these various expenses move with the product (or service) through 澳洲幸运5官方开奖结果体彩网:inventory accounts until the product is sold. The 澳洲幸运5官方开奖结果体彩网:income statement will then recognize these as expenses under 澳洲幸运5官方开奖结果体彩网:costs of goods sold (COGS).

Full Costing Vs. Variable Costing

The alternative to the full costing method is known as variable or direct costing. The treatment of fixed manufacturing overhead costs, such as salaries and building leases, is the primary difference between these two di🦄fferent accounting styleꩲs.

Companies that use variable costing separate these 澳洲幸运5官方开奖结果体彩网:operating expenses from production costs. In short, they seek to establish the expenses incurred during the manufacturing process, independent o♊f the everyday costs of running a business.

Under the variable costing method, fixed manufacturing overhead costs are expensed during the period they are incurred. In contrast, the full costing approach recognizes fixed manufacturing overhead costs as an expense when goods or services are sold. Choosing one method over another can have sizable effects on the reporting of 澳洲幸运5官方开奖结果体彩网:financial statements.

In practice, neither costing method is right or wrong. Some organizations will find variable costing more effective, while others will prefer full costing. The usefulness of method selection boils down to managerial attitude, behavior, and 澳洲幸运5官方开奖结果体彩网:organizational design as it relates🐓 to accurate input cost capture and v🐲aluation.

As more businesses move to 澳洲幸运5官方开奖结果体彩网:just-in-time (JIT) or related streamlined production procedures and inventory systems, in many ways, direct or full costing methods lose their significance, because fewer costs and expens🐓es are tied up in productꦍion processes.

Advantages of Full Costing

Compliant With Reporting Rules: One of the biggest benefits of full costing is that it complies with GAAP. Even if a company decides to use variable costing in-house, it is 澳洲幸运5官方开奖结果꧂体彩网:required by law to use full costing in a♚ny external financial statements it publishes. Full costing is also the method that a company is required to use for calculating and filing its taxes.

Accounts for All Production Costs: Factoring in all expenses provides investors and management with a complete picture of how much it 澳洲幸运5官方开奖结果体彩网:costs a company to manufacture its products. Establishing the total 澳洲幸运5官方开奖结果体彩网:cost per unit♊ helps businesses to determine suitable pricing🐟 for goods and services.

Easier to Track Profits: Full costing presents a more accurate idea of profitability than variable costing if all of the products are not sold during the same 澳洲幸运5官方开奖结果体彩网:accounting period when they are manufactured. This can be especially important for a company that ramps up production well in advance of an anticip🐬ated seasonal increase in sales.

Disadvantages of Full Costing

Difficult to Compare Product Lines: Full costing also has severꦚal drawbacks. For exam✨ple, taking into account all expenses, including those not directly associated with production, may make it slightly harder for management to compare the profitability of different product lines.

Impacts Efforts to Improve Operational Efficiency: Management teams using full costing will also find it more challenging to run 澳洲幸运5官方开奖结果体彩网:cost-volume-profit (CVP) analysis, which is used to determine how many products a company must manufacture and sell to reach the point of profitability, and improve operational efficiency. If fixed costs are an especially large part of total 澳洲幸运5官方开奖结果体彩网:production costs, it is difficult to determine variations in 🍷costs t🌃hat occur at different production levels.

Can Skew Profit: Another major flaw of full costing is that it can potentially mislead investors. Fixed costs are not deducted from revenues unless all of the company's manufactured products are sold, meaning that a company's profit level can appear better than it actually is during a specified accounting period.