Full costing

Welcome to our lecture on full costing, a crucial concept in managerial accounting for both manufacturing and service firms. Full costing, also known as absorption costing in the United Kingdom and United States, is a method of accounting that assigns all direct and indirect production costs to individual units of output. Full costing is essential for managers when setting prices, valuing inventory, and preparing financial statements. This comprehensive approach reflects the entire cost incurred in producing goods or delivering services, supporting informed decision making and ensuring compliance with accounting standards. Full costing includes not only the direct costs, such as direct materials and direct labor, but also a proportionate share of indirect costs known as manufacturing overheads. Direct costs are those easily and cost effectively traced to a single product or service, like the wood in a chair or wages for an assembly line worker. Manufacturing overheads, by contrast, include expenses such as factory rent, utilities, depreciation on equipment, and wages for supervisory staff. Under full costing, these overheads are systematically allocated to each unit produced, ensuring that every product or service reflects its fair share of all costs associated with the production process. Let's consider how full costing works in practice. In manufacturing, full costing tracks, direct materials, direct labor, and allocated overhead through inventory accounts, raw materials, working process, and finished goods.