This is an administrative bookkeeping method, which illustrates the use of all the fixed and variable costs inclusive of manufacturing costs to calculate the total cost per minute. It includes the costs incurred during the calculation of the amount of money required to generate and dispense one unit of the output. This method ensures all the costs incurred are regained from the selling price of goods or services. Full costing is also referred to as absorption costing or full costs.
How and When the Concept Could Be Used By SAC
It can be used by the company in decision making and during calculations to establish the variable and fixed costs that it incurs. It could also be used when calculating money. In such a case it prevents undue expenditures and helps one in saving for future expenses and projects (Klingstedt, 1970, p. 81).
Full Costing Concept vs. Other Concepts
The full costing concept encompasses all the manufacturing costs including direct labor, direct materials, and both fixed and manufacturing overheads. The variable costing, on the other hand, only includes the variable manufacturing costs. Variable manufacturing costs consists of expenses such as direct labor, direct materials as well as other variable manufacturing overheads.
As opposed to full costing, the target costing approach is a more comprehensive process that allows the implementation of a lean enterprise besides maintaining a cost effective system.
Life-cycle costing is mostly concerned with determination of costs associated with assets. This makes it different from full costing, which is mostly concerned with fixed and variable costing.
Activity based costing is a concept that is mostly concerned with the identification of activity within an organization and the subsequent assigning of cost against each activity including the resources to all products and in accordance with the individual real consumption (Pizzey, 2011, p. 27).
Advantages of Full Costing Concept
Full costing ensures accuracy by providing the real reflection of the costs and services that they support. It also provides for transparency through its allocation method, which is generally defensible and clear. This has the benefit of boosting the trust between organizations and their funding agencies or partners. The full costing concept also allows for the efficiency by decreasing the time that is spent in repackaging and scrutinizing costs by organizations and their financiers. It also brings about the appropriateness and sustainability. This is accomplished by ensuring that only the overhead costs that support the project are paid for. This helps the organization survive for longer durations as it carries on with its projects (Weygandt, Kimmel, & Kieso, 2009, p. 404).
Disadvantages of Full Costing Concept for a Company
The full costing concept is inadequate for the decision making process that is important in any organization. This is due to its concept of allocating fixed overhead costs to the unit level. This in essence would translate to the production of the overhead costs by the additional units contrary to revenue generation. This concept also tends to hide in inventory. This is because there is an allocation of fixed overheads to the finished unit, which must be sold for the cost to appear as an expense. It is also unsuitable for irregular volumes. Therefore, the irregular sales and uneven production induces variations besides reducing the selling prices of fixed and variable assets (Goektuerk, 2007, p 11).
Goektuerk, H. (2007). Activity-based costing (ABC) – advantages and disadvantages: How ABC can be applied to institutions of higher education. New York, NY: GRIN Verlag.
Klingstedt, J. P. (1970). Effects of full costing in the petroleum industry. Financial Analysts Journal, 26(5), 79-86.
Pizzey, A. (2011). Cost and management accounting: an introduction for students. London: SAGE.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2009). Managerial accounting: tools for business decision making. New York, NY: John Wiley & Sons.