Full Costing

• In the long term, fixed costs may grow as a result of short term decisions that treat them as irrelevant (such as CM analysis). Full Costing takes all costs over an intermediate period into account to remedy this issue by analysing profitability over time and making more accurate pricing decisions that allow reinvesting into the company (e.g. machinery) over time.
• Full (Absorption) Costing is the sum of all costs (direct & indirect) related to a product until it is delivered.
• Aside from volume (used in variable costing), there are several other cost drivers. Examples include product complexity, product mix, factory layout or technology. These measurable bases are turned into cost allocation bases.
• Using Normal Volume for calculations is the recommended option as it is the most stable. It is the average long-run level of activity over a period beyond one year, and it cancels out seasonal and cyclical variations and trend factors.
• Using the Budgeted Volume for calculations is often the preferred option as it can be used to manipulate data (budget low volume so that when actual volume is released, it seems like the company overperformed and managers get higher bonuses).
• Under full costing, allocation of overhead costs makes people question the size of costs in other units, ensuring fair and accurate allocations
• Under full costing, the basis of allocations can lead people to better investigate the sources of costs and potential areas of cost reductions
• Full costing is less effective with increasing automation in the production process (DL is a smaller component and MOH mark-up becomes >1000%, leading to cost distortions)
• Under full costing, products in manufacturing don’t utilise the fixed equipment in the same manner as they utilise labour in their production (there can be varying levels of machine usage despite similar labour inputs) so it is wrong to treat them as proportionate
• Under full costing, products requiring high machine usage but minimal direct labour become undercosted, as the allocated overhead cost fails to reflect the actual consumption of machine resources.