FULL COSTING APPROACH
In full costing, total costs are taken into account for product costing, inventory valuation and other allied important decisions. Full costing takes into account total costs. Full costing method absorbs all cost necessary to produce the product and to have it in a production costs. Full costing technique recognizes fixed overheads also as a product cost in addition to material, labour and respect: fixed manufacturing overheads are included in product cost under absorption costing; they are excluded under variable costing. Income statements for external reporting and for tax purposes are to be on a full costing basis. All these points are taken care of by the experts providing Accountinghomework help and assignment help at transtutors.com.
Income statement (full costing)
Sales revenue (number of unit sold * selling price) __
Less: total costs of manufacturing:
Direct material cost _____
Direct labor cost ___
Variable manufacturing overhead ___
Fixed manufacturing overhead ___ __
Total cost of goods manufactured ( ) __
Plus: cost of inventory in the beginning ( )
Of the year (units * total cost) (+/-)
Less: cost of inventory in end of the year (units * total cost)
Costs of goods manufactured and sold
Gross margin (manufacturing) (unadjusted)
Adjustment for capacity variance (+favorable - unfavorable)
Gross margin (adjusted)
Less: non production costs:
Selling and distribution cost ___
Administrative cost __
Other cost __ ( )
Net income before income taxes ( )
Less: income taxes
Net income after income taxes ___________
The following list highlights the basic tenets of FCA.
1. Accounting of the hidden costs and of the externalities
2. Accounting of the overhead and the indirect costs
3. Accounting of the past and the future outlays
4. Accounting of the costs according to the lifecycle of the product
Fixed manufacturing overheads form part of production with full costing. There is also treatment of selling and administrative overhead. Full costing is based on the principle that all the manufacturing costs (direct, variable, as well as non variable costs) should be charged to the production of a given period and fixed manufacturing overheads are charged to the product by using a pre determined rate, designated as the standard fixed overhead rate (SOFR) of recovery. The SOFR is determined by dividing the former amount with the later amount. The products are charged for fixed overheads. If the plant operates above or below its normal capacity, the fixed manufacturing overheads will be over/under-absorbed; the over/under absorbed overhead amount is designated as the capacity variance and is written off to operate for the year.All these points are taken care of by the experts providing Accountinghomework help and assignment help at transtutors.com.
The principles of absorption costing: It follows that profits are affected not only by the sales volume, selling price, cost of production, but also by the quantity of units produced during the period. Accordingly, a firm may produce goods regardless of sales, and still the profit and loss account may reflect profit earned, whereas in reality there is simply pilling up of stocks of inventory in the factory godowns. The hypothetical/ typical case for such a situation is that a firm has produced more than its normal capacity and, therefore, over absorbed its actual fixed overheads. The firm, in spite of not making sales of even a single unit, will show gross margin to the extent of over absorption of the sixed manufacturing overheads. All these points are taken care of by the experts providing Accountinghomework help and assignment help at transtutors.com.
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