Full costing, or absorption costing, is an accounting method used to include all of the direct and indirect costs in producing a product, including fixed costs, such as overhead and sales, marketing, and production expenses. All of these costs are spread out, or “absorbed” across all of the sold products over an accounting period, rather than being apportioned to a single product or a set of products.
The advantage of this approach is that it allows companies to comply with Generally Accepted Accounting Principals (GAAP) and other applicable reporting rules, as well as providing a more transparent view of profitability. By spreading out all of the costs, it becomes easier for a company to get an accurate picture of how profitable each product is compared to other products and services.
On the other hand, there are some potential drawbacks to full costing. Because all of the costs are being distributed across each product, these costs can be either understated or overstated. As a result, it can be difficult to determine variations in costs at different production levels. This can lead to inaccurate reporting of profits on a product-by-product basis, which can lead to misinformed decision-making by management.
Furthermore, fixed costs are especially difficult to accurately account for using full costing. Fixed costs are those such as salaries and rent that remain the same regardless of the number of products produced. Because of this nature, it can be difficult to calculate the actual cost of a fixed cost that has been allocated across all of the products.
Despite these drawbacks, full costing is one of the most accepted methods of accounting for overall expenses and profits. By providing a comprehensive view of the cost structure, companies can stay compliant with various regulations and directives while also obtaining a better view of a product’s profitability.
The advantage of this approach is that it allows companies to comply with Generally Accepted Accounting Principals (GAAP) and other applicable reporting rules, as well as providing a more transparent view of profitability. By spreading out all of the costs, it becomes easier for a company to get an accurate picture of how profitable each product is compared to other products and services.
On the other hand, there are some potential drawbacks to full costing. Because all of the costs are being distributed across each product, these costs can be either understated or overstated. As a result, it can be difficult to determine variations in costs at different production levels. This can lead to inaccurate reporting of profits on a product-by-product basis, which can lead to misinformed decision-making by management.
Furthermore, fixed costs are especially difficult to accurately account for using full costing. Fixed costs are those such as salaries and rent that remain the same regardless of the number of products produced. Because of this nature, it can be difficult to calculate the actual cost of a fixed cost that has been allocated across all of the products.
Despite these drawbacks, full costing is one of the most accepted methods of accounting for overall expenses and profits. By providing a comprehensive view of the cost structure, companies can stay compliant with various regulations and directives while also obtaining a better view of a product’s profitability.