Full Cost Accounting Explained
The benefits of full cost accounting
Due to the numerous advantages that full cost accounting provides, it is frequently used in business calculations. Here are some benefits to full cost accounting:
Provides a simple way to track company profits
By comparing how much the company has made in relation to how much it has spent, you can more easily track profits when listing and calculating the full cost in all areas of production. For instance, once you start earning more than the $50,000 annual full cost of running the business, you’ll be able to determine how profitable it is.
Allows an understanding of all parts of production
You can respond to any inquiries or concerns that come up in the company by being aware of where all of the company’s materials are sourced, how much they cost, and how long it takes to create the products. For instance, by reviewing the complete cost report, you can determine why the company is spending so much on making soda cans and where the additional expense is coming from.
Improves areas of production
Examining the complete cost accounting report is a great way to enhance various production areas. For instance, if the business manufactures toys, you might find that one toy is more affordable to produce than another. By comparing what the company is doing differently for both toys, you can use full cost accounting to possibly reduce the price of the more expensive toy.
Gives leverage in negotiating with vendors
Utilizing full cost accounting gives you leverage when negotiating with suppliers, which could lead to a rise in revenue. For instance, if the city contracts a construction company to build a sidewalk, the company can negotiate their fee to a good profit if they are aware of the full cost of hiring employees, renting equipment, and buying cement and other materials.
What is full cost accounting?
The process of determining the total value of a company’s products is known as full cost accounting. This includes estimating how much the product’s materials will cost and the costs associated with producing the product, as well as calculating the total cost of the product from conception to completion.
How to calculate full cost accounting
Full cost is the sum of the direct, indirect, and variable costs.
Here are the steps to calculate full cost accounting:
1. Calculate the direct costs
The total of the direct costs must be calculated as the first step in full cost accounting. Any costs that are directly connected to the production of a product are considered direct costs. Direct costs can include:
2. Calculate the indirect costs
The total of indirect costs will then be added as a final step. Any costs incurred that have an indirect impact on a product’s development are referred to as indirect costs. Indirect costs can include:
3. Calculate any variable costs
Anything without a set price or that could change depending on how much of the product sells is considered a variable cost. Products offered by a company might not have any variable costs. Variable costs can include:
4. Add the direct, indirect and variable costs together
When you’ve finished figuring out the three different costs, add these figures up to produce a complete cost report. The total cost, for instance, would be $1,500 if the total direct cost was $500, the total indirect cost was $1,000, and the total variable cost was $0.
Examples of full cost accounting
Here are a few instances of businesses using full cost accounting:
Example 1
Hans owns a pizzeria. He wants to calculate the full cost of his business. He first calculates the cost of his employees and the cost of his restaurant’s licenses and certificates before moving on to indirect costs. Next, he calculates the indirect costs. He learns how much money he spends annually on his own salary, utilities, and rent. Finally, he estimates the variable costs. He calculates the cost of how many raw materials he needs to buy each week for his pizzeria by looking at how many pizzas he sells each day. After calculating these costs, he totals them to determine the total annual cost of operating his pizzeria.
Example 2
A client has just hired Stephanie, who owns a construction company, to build them a house. She calculates the full cost of the construction. First, she looks at the direct costs. She calculates how many workers she will need and how long it will take them to finish the task. She also calculates the cost of the house’s supplies and materials. Next, she looks at the indirect costs. She estimates the cost of the necessary rental equipment and any additional tools the workers might require. Finally, she learns that the prices of the goods won’t change. She adds up all three figures to get the total cost of building the house, then calculates what the customer should pay in order to turn a profit.
Example 3
Emir, who owns a consulting business, wants to determine exactly how much his business spends annually. First, Emir looks at his direct costs. His only direct cost is on his businesss licenses. Next, he looks at the indirect costs. He determines the costs of his office’s rent and utilities, his own and his employees’ salaries, and the equipment his office needs. Lastly, he looks at his variable costs. He estimates a yearly expense for his variable costs, knowing that he pays a bonus to any employees who bring in new clients. Finally, he adds up all three figures to determine the total annual cost of his company.
FAQ
What is full cost accounting?
Calculating the total value of a company’s products through full cost accounting This includes estimating the cost of the product’s materials and the costs associated with producing the product, as well as calculating the total cost of the product from conception to completion.
What are the 4 types of cost accounting?
Standard costing, activity-based costing, lean accounting, and marginal costing are examples of different types of cost accounting.
What are features of full cost accounting?
A full cost accounting system is made to track all costs associated with providing goods and services. Full cost accounting systems include a wider range of costs, whereas standard cash flow accounting practices concentrate on immediate, current costs and expenditures.
