Full Cost Accounting: Definition, How To Calculate and Examples

Because of this evolution of terminology in the public sector use especially, the term full-cost accounting is now more commonly used in management accounting, e.g. infrastructure management and finance. Use of the terms FCA or TCA usually indicate relatively conservative extensions of current management practices, and incremental improvements to GAAP to deal with waste output or resource input.

Full Cost Accounting Explained

The benefits of full cost accounting

Full cost accounting is a common business calculation because it offers a variety of benefits. Here are some benefits to full cost accounting:

Provides a simple way to track company profits

When listing and calculating the full cost in all areas of production, you can more easily track profits by comparing what the company has made versus how much it has spent. For example, if you know the yearly full cost of running the business is $50,000, youll know how profitable the company is once youve started making more than that.

Allows an understanding of all parts of production

Understanding where all of the companys materials are coming from, how much they cost and the time it takes to create the products allows you to answer any questions or concerns that arise in the company. For example, if you want to know why the business is spending so much on producing soda cans, you can figure out where the extra cost is coming from by looking through the full cost report.

Improves areas of production

A great way to improve different areas of production is by examining the full cost accounting report. For example, if the company creates toys, you might discover that one toy costs less to make than another. By using full cost accounting, you can compare what the business is doing differently for both toys and possibly lower the cost of the more expensive one.

Gives leverage in negotiating with vendors

When you use full cost accounting, you can create leverage for negotiating with vendors and possibly increasing your revenue. For example, if the city hires a construction company to build a sidewalk, the company can negotiate their fee to a good profit if they know the full cost of hiring the workers, renting the equipment and purchasing the cement and supplies.

What is full cost accounting?

Full cost accounting is the act of calculating the total value of a companys products. This includes calculating the cost of the creation of the product from start to finish, including estimating how much the products materials cost and the expenses required for creating the product.

How to calculate full cost accounting

Full cost = direct costs + indirect costs + variable costs

Here are the steps to calculate full cost accounting:

1. Calculate the direct costs

The first step in full cost accounting is figuring out the sum of the direct costs. The direct costs are any expenses directly related to the creation of a product. Direct costs can include:

2. Calculate the indirect costs

The next step is to include the sum of indirect costs. Indirect costs are any expenses being paid that indirectly affect the development of the product. Indirect costs can include:

3. Calculate any variable costs

Variable costs include anything that doesnt have a fixed price or might change based on how much of the product sells. It is possible that a companys products might not have any variable costs. Variable costs can include:

4. Add the direct, indirect and variable costs together

After youre done calculating the three different expenses, add these numbers together to create a full cost report. For example, if the total direct cost is $500, the indirect cost is $1,000 and the total variable cost is $0, then the full cost is $1,500.

Examples of full cost accounting

Here are a few examples of using full cost accounting in businesses:

Example 1

Hans owns a pizzeria. He wants to calculate the full cost of his business. First, he starts with the direct costs and figures out the cost of his employees and the cost of his restaurant licenses and certificates. Next, he calculates the indirect costs. He discovers how much he spends every year on rent, utilities and his own salary. Finally, he estimates the variable costs. For his pizzeria, he looks at how many pizzas he sells per day and from there generates the cost of how many raw materials he needs to purchase every week. Once hes finished calculating those expenses, he adds them together to discover his yearly full cost of running his pizzeria.

Example 2

Stephanie runs a construction company, and a customer has just hired her to build them a house. She calculates the full cost of the construction. First, she looks at the direct costs. She figures out how many laborers she needs and how long it will take them to complete the job. She also figures out the cost for the houses materials and supplies. Next, she looks at the indirect costs. She calculates the cost of equipment that will need to be rented and other tools the laborers might need. Lastly, she discovers that there will be no variable costs to the products. She adds all three numbers together to discover the full cost of building the house and determines how much she should charge the customer in order to make a profit.

Example 3

Emir runs a consulting firm and wants to calculate the full cost of what his company spends per year. First, Emir looks at his direct costs. His only direct cost is on his businesss licenses. Next, he looks at the indirect costs. He calculates how much the rent and utilities of his office space is, the salaries of himself and his employees and the cost of his office equipment. Lastly, he looks at his variable costs. Knowing that he offers a bonus to any employees who find new clients, he includes that in his variable costs by estimating a yearly expense. Finally, he adds all three numbers together to find the yearly full cost of his business.

FAQ

What is full cost accounting?

Full cost accounting is the act of calculating the total value of a company’s products. This includes calculating the cost of the creation of the product from start to finish, including estimating how much the product’s materials cost and the expenses required for creating the product.

What are the 4 types of cost accounting?

Types of cost accounting include standard costing, activity-based costing, lean accounting, and marginal costing.

What are features of full cost accounting?

A full cost accounting system is designed to measure the complete, true costs of goods and services. While standard cash flow accounting practices focus on direct, current costs and expenditures, full cost accounting systems incorporate a wider range of costs.

What is a full cost model?

Full cost model refers to a cost calculation method where all costs of an organisation are allocated to a cost object (e.g. a project) in accordance with the matching principle, regardless of the funding source. This is based on the direct costs for effective working hours in accordance with the matching principle.

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