Full-Costing Technique, or Absorption Costing, is a method of costing in which all Direct Costs and Indirect Costs (Overheads) are allocated to products, divisions or departments of the business.
Full-Costing Technique is useful for firms as a quick guideline to figure out Total Costs (TC) of the particular product. It is because all costs of the business have been allocated among all the products that the business produces.
First, total Direct Costs for each product need to be calculated. Then, accountants calculate the total Indirect Costs (Overheads) incurred by the business. Finally, they divide, or allocate, those total Indirect Costs (Overheads) between all products, divisions or departments in the firm.
The allocation of Indirect Costs (Overheads) into different products, divisions or departments can be done on the basis of the proportion of total direct labour costs incurred by the products that each account for. Alternatively, Indirect Costs (Overheads) could be apportioned to products on the basis of the proportion of raw materials used in the production of each product.
Example of Full-Costing Technique
The fast-food restaurant sells four different products: hamburgers, hot-dogs, pizzas and sandwiches.
Total cost of direct labor amounts to USD
400 (20%) of this total; hot-dogs account for USD
800 (40%) and sandwiches account for USD
10,000. If these Indirect Costs (Overheads) are allocated on the basis of the proportion of total labour costs incurred by all four products, then a full-costing statement will look like this:
| Hamburgers | Hot-dogs | Pizzas | Sandwiches | |
|---|---|---|---|---|
DIRECT COSTS | ||||
| DIRECT MATERIALS: |  500 |  500 | ||
| DIRECT LABOR: |  20010% |  60030% | ||
INDIRECT COSTS (OVERHEADS) = USD |  4,00040% |  3,400 |  6,800 |  .It is quite obvious now to determine that total cost of making hamburgers is USD Also, in theory, the total costs figure for each product will be true and accurate, only if the business really produces the same output that was used in constructing a full-costing statement. If an oven to bake pizzas breaks down making the restaurant unable to serve pizzas for the whole week, then there will be a fall in both the real direct costs and indirect costs of producing pizzas.  I am the Founder and Editor-in-Chief of the SuperBusinessManager.com website. I am the EU citizen with approximately 20 years of experience in secondary and higher business education in both public and private sectors. Currently living with my wife and our two adorable children in China where I teach Business Management and Economics at K-12 international schools. Professionally, I am an experienced Lecturer and Researcher in Business Management and Economics, as well as IB Examiner for DP Business Management at International Baccalaureate (IB). Privately, I enjoy reading and collecting books on business management, personal finance and investing. You can contact me at jerrygrzegorzek@hotmail.com |
2,000
1,700; pizzas is USD![6,800 and sandwiches is USD4,100. <!-- /wp:paragraph --> <!-- wp:paragraph --> After we divide total costs for each product by the Output produced, we will come up with Average Cost (AC) of making each product. This can be useful for setting prices for those four products. <!-- /wp:paragraph --> <!-- wp:separator {"opacity":"css"} --> <hr class="wp-block-separator has-css-opacity"/> <!-- /wp:separator --> <!-- wp:html --> <script async="" src="https://pagead2.googlesyndication.com/pagead/js/adsbygoogle.js?client=ca-pub-3196649779609103" crossorigin="anonymous"></script> <!-- Inside Content --> <ins class="adsbygoogle" style="display:block" data-ad-client="ca-pub-3196649779609103" data-ad-slot="4855547878" data-ad-format="auto" data-full-width-responsive="true"></ins> <script> (adsbygoogle = window.adsbygoogle || []).push({}); </script> <!-- /wp:html --> <!-- wp:separator {"opacity":"css"} --> <hr class="wp-block-separator has-css-opacity"/> <!-- /wp:separator --> <!-- wp:heading --> <h2 class="wp-block-heading"><strong>Evaluation of Full-Costing Technique</strong><strong></strong></h2> <!-- /wp:heading --> <!-- wp:paragraph --> Full-Costing Technique is particularly suitable to businesses that produce only one product. So, there is no uncertainty whatsoever about what percentage of overheads should be allocated to which product. Single-product firms can freely use this method for making pricing decisions, especially when using mark-up pricing. <!-- /wp:paragraph --> <!-- wp:paragraph --> For businesses with a larger number of products in their portfolio, Full-Costing Technique is relatively easy to calculate in order to figure out total costs of making each product in the business. By using either the cost of direct labor or the cost of raw materials as a basis for allocating total Indirect Costs (Overheads), it makes the process quite straightforward. <!-- /wp:paragraph --> <!-- wp:paragraph --> A big benefit of using Full-Costing Technique is that all costs, both Direct Costs and Indirect Costs (Overheads), are allocated between all products and no costs are ignored in the process. In this way, business managers can make comparisons between different products in a particular year, as well as make comparisons of costs calculated on the same basis with costs incurred in previous years. <!-- /wp:paragraph --> <!-- wp:paragraph --> Therefore, it is advisable that the same basis for allocation is used over time. Otherwise, we will not be able to make meaningful comparisons. If the way of allocating Indirect Costs (Overheads) changes every year, then this could lead to inconsistencies in <a href="https://www.superbusinessmanager.com/why-is-costs-data-important-to-the-business/" title="Why Is Costs Data Important to the Business?">costs data</a>. <!-- /wp:paragraph --> <!-- wp:paragraph --> And of course, the biggest issue with Full-Costing Technique is that this method does not apportion overheads on a factual basis. Indirect Costs (Overheads) are not allocated on the basis of real expenditure incurred by the business. We do not know whether the business really spent those USD](https://www.SuperBusinessManager.com/wp-content/ql-cache/quicklatex.com-95325e43ccd5e9c8bfe0a6da8228d078_l3.png "Rendered by QuickLaTeX.com")
2,000 on Indirect Costs (Overheads) related to producing hamburgers. Therefore, this number can be inaccurate or misleading making it dangerous to fully rely on Full-Costing Technique for making final pricing decisions.
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