Full Costing
Definition
Full costing, also known as absorption costing, is an accounting method that assigns all direct and indirect manufacturing costs to the product. This includes direct costs, such as raw materials and labor, as well as a share of indirect costs, including overhead costs like utilities, rent, and administrative expenses. This approach contrasts with direct costing (or variable costing), where only variable costs are assigned to product costs.
Examples
- Manufacturing Company: A car manufacturing company uses full costing to allocate costs. The total cost of producing a car includes the cost of steel (direct material), wages for assembly line workers (direct labor), and a portion of factory rent and administrative salaries (overhead).
- Pharmaceutical Company: A pharmaceutical company producing drugs includes the cost of active pharmaceutical ingredients (direct costs) and incorporates the costs of running the research lab and quality control activities (indirect costs) into the product cost.
Frequently Asked Questions
Q: What are the primary components of full costing?
- Full costing includes direct materials, direct labor, and both variable and fixed manufacturing overhead costs.
Q: How does full costing differ from direct costing?
- Full costing includes all manufacturing costs (both fixed and variable), while direct costing only includes variable manufacturing costs in product costs.
Q: Why might a company prefer full costing?
- Full costing provides a more comprehensive view of product costs and is often required for financial reporting under generally accepted accounting principles (GAAP).
Related Terms with Definitions
- Absorption Costing: Another term for full costing, where all production costs are absorbed by the units produced.
- Direct Costing (Variable Costing): An accounting method where only variable manufacturing costs are considered product costs. Fixed overhead is treated as a period expense.
- Direct Materials: The raw materials that can be directly traced to the production of a specific product.
- Direct Labor: The labor costs that can be directly traced to the production of a specific product.
- Overhead Costs: Indirect costs related to manufacturing that cannot be directly traced to a specific product, such as rent and utilities.
Online References
Suggested Books for Further Studies
- “Cost Accounting: A Managerial Emphasis” by Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
- “Management and Cost Accounting” by Alnoor Bhimani, Charles T. Horngren, Srikant M. Datar, and Madhav V. Rajan
- “Cost Accounting: Foundations and Evolutions” by Kinney and Raiborn
Fundamentals of Full Costing: Cost Accounting Basics Quiz
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