The full cost accounting is a means to evaluate business decisions and be able to make it. All costs on the products are offset in the full cost calculation. Many entrepreneurs use them in their everyday life. In this article, you can find out what exactly the full cost calculation is and how you can calculate the full costs.
What is full cost accounting?
The full cost accounting is made up of the combination of all cost accounts . It records fixed costs from your company, such as standby costs, rent and depreciation , but also variable costs or individual costs (for example raw materials and components). The full costs are the proportionate overhead costs and proportionate fixed costs that can be allocated to a unit of a cost unit. If you add up all the full costs of a product or service, this sum forms the total costs of the company.
According to healthknowing, the full cost accounting therefore describes a system of cost accounting. All costs incurred within a period are distributed among the various cost units. Traditional full cost accounting includes:
- Cost type accounting
- Cost center accounting
- Cost unit accounting
Subdivision of the full cost accounting into three steps
As mentioned above, full cost accounting can be divided into three main steps.
In the following we explain these three steps in more detail:
The cost type calculation
Within cost type accounting , the question always arises as to which costs have actually been incurred. In order to be able to answer this question, you should systematically record all costs of the production process . Once you have recorded these costs, you break them down into direct and overhead costs.
The direct costs arise from the production of a certain process and are also assigned directly to it. An example of the individual costs would be the material costs that have to be raised for this.
The overhead costs, on the other hand, are not related to the product. So they are common. Heating costs or rent belong to this type of cost.
The cost center accounting
In the second step, i.e. within cost center accounting , the question is asked where the costs are actually incurred . So that you can determine the “where?” You add the overhead costs to the products. For this you can use the principle of averaging.
Then the overhead costs are only partially allocated to the products. The cost center accounting takes place within the framework of the internal cost allocation and is allocated in full to the final costs. The company accounting sheet is the most important part of this invoice.
Cost unit accounting
In the third and last step, you summarize the cost unit accounting and the cost type accounting. You make this summary so that the controlling of the profitability and the price calculation of the products can be better controlled.
What is the aim of full cost accounting?
With the help of full cost accounting , all costs that arise within your company are to be distributed to the respective cost units . For example, you can determine the cost of one unit of a certain product. The full cost calculation also helps in assessing and calculating the price . In the case of partial cost accounting, on the other hand, you only take into account the variable costs or individual costs . But it is also used at the level of program planning. It also determines the production and sales program.
If there are conflicts of interest in your company, she can also help and offer solutions. Such a problem can be the distribution of capacities, for example.
Differentiation between full cost accounting and partial cost accounting
In addition to full cost accounting, there is also what is known as partial cost accounting . The difference is that in the partial cost accounting not all costs are allocated to the cost objects. You use a partial cost calculation for a short-term calculation where the amount of the investment is lower.
To explain this with an example, you can imagine that you determine the costs per kilometer driven with your car.
Calculation of full costs
Within the full cost calculation, you include all costs , such as the cost of fuel, insurance, depreciation, tax and so on.
Example and calculation of partial cost accounting
In contrast to this, the partial cost calculation only refers to the partial costs , in this example the fuel costs. In this example, you only use partial cost accounting for short-term decisions . For example, if you have questions about whether you want to go by car or rather by train the next day.
Calculation of the full costs with the help of a scheme
You can use a calculation scheme to calculate the full costs. You can calculate the production costs, the prime costs and the sales price of a product. This scheme shows the components of the costs.
The production costs are defined by the costs incurred up to the completion of the product.
The cost are seen all the selling and administrative expenses. So it is the cost of marketing and manufacturing.
The selling price is determined by the cost. This makes the operating profit .
Example of full cost accounting
So that you can visualize this scheme, here is an example based on an ice cream parlor:
As an example, let’s take an ice cream parlor that sells 2,000 scoops of ice cream a day. This business has fixed costs of € 300 for rent and variable costs, which depend on the volume of sales, in this case let’s say 40 cents per scoop of ice cream. If you now create a full cost calculation, you will offset all costs on the products.
This is done in two very simple steps.
You calculate the overhead costs by taking the fixed costs (€ 300 rent divided by the sales volume (here 2,000 scoops of ice cream). This results in 15 cents in this example.
Now you simply add the overhead costs to the individual costs.
So in this example: 0.15 + 0.40 = 0.55 euros
If the ice cream parlor wants to make a profit, it has to estimate the cost of a scoop of ice cream to be higher than 55 cents all year round.
Advantages and disadvantages of full cost accounting
| advantages | disadvantage |
| Full cost accounting is a simple tool for calculating costs. | Proportionalization of the fixed costs. This means that the respective product is assigned the costs that are incurred regardless of the production. For example, depreciation costs are one of these costs. |
| It is also a means that forms the decision-making basis for medium and long-term production planning. | Even for short-term decisions about production and pricing, full cost accounting is not the optimal solution. |
Conclusion
The full cost calculation is very easy to carry out and is divided into three parts. These three parts are cost type accounting, cost center accounting and cost unit accounting. Full cost accounting is a good basis for determining medium and long-term corporate decisions. However, it is not particularly well suited for determining short-term decisions.
