Full Costing: Comprehensive Allocation of Costs

Full costing, also known as absorption costing, is an accounting method that assigns all manufacturing costs to the product. This includes both variable and fixed costs. It contrasts with direct costing which only includes variable manufacturing costs.

Full costing, also known as absorption costing, is an accounting method where all fixed and variable manufacturing costs are assigned to the product. This method is mandated by generally accepted accounting principles (GAAP) and is widely used for external reporting.

Key Components of Full Costing

Manufacturing Costs

Variable Costs

These are costs that fluctuate with the level of production, such as raw materials and direct labor.

Fixed Costs

These are costs that remain constant regardless of production levels, such as depreciation of equipment and salaried personnel.

Inventory Valuation

In full costing, the cost of goods manufactured includes both variable and fixed manufacturing costs, ensuring that all costs of production are included in inventory valuation.

$$ \text{Cost of Goods Manufactured} = \text{Total Variable Costs} + \text{Total Fixed Costs} $$

Special Considerations in Full Costing

Matching Principle

Full costing adheres to the matching principle, ensuring that revenues and all costs associated with generating those revenues are recorded in the same accounting period.

Impact on Financial Statements

Full costing impacts both the balance sheet and the income statement. Inventory on the balance sheet includes all manufacturing costs, and the cost of goods sold on the income statement includes overhead allocation.

Comparisons

Full Costing vs. Direct Costing

• Full Costing: Allocates both fixed and variable costs to products.
• Direct Costing: Assigns only variable manufacturing costs to products.

Example:

• Full Costing: A product costs $50 in raw materials, $20 in labor, and $30 in overhead (total $100).
• Direct Costing: The same product would only include the $50 in raw materials and $20 in labor (total $70).

Historical Context

Full costing has been the standard for external financial reporting since the advent of GAAP and is required for compliance with various financial regulations worldwide.

Applicability

Industries

Full costing is applicable across various industries, especially those with significant fixed costs, such as manufacturing.

Regulatory Compliance

Ensures compliance with GAAP and International Financial Reporting Standards (IFRS).

Related Terms

• Absorption Costing: Another term for full costing, highlighting the inclusion of all manufacturing costs.
• Variable Costing: An alternative method focusing solely on variable costs for internal decision-making purposes.
• Overhead Allocation: The process of assigning overhead costs to products, a critical element in full costing.

FAQs

Why is full costing important?

Full costing provides a comprehensive view of product costs, ensuring all expenses are accounted for in financial statements.

What are the drawbacks of full costing?

It can obscure the true variable costs of production, potentially leading to less informed decision-making.

How does full costing impact pricing decisions?

By including fixed costs in product costs, full costing can lead to higher product prices compared to variable costing.

References

• “Principles of Cost Accounting” by Edward J. Vanderbeck.
• Generally Accepted Accounting Principles (GAAP).
• International Financial Reporting Standards (IFRS).

Summary

Full costing is a critical accounting method that assigns all manufacturing costs, both fixed and variable, to products. This comprehensive approach ensures accurate financial reporting and compliance with accounting standards, thereby playing a crucial role in financial decision-making and inventory valuation.

For further details, see [Absorption Costing]. Contrast with [Direct Costing].