A full cost accounting system is designed to measure the complete, true costs of goods and services. While standard cash flow accounting practices focus on direct, current costs and expenditures, full cost accounting systems incorporate a wider range of costs. Full cost accounting's advantage, when compared to cash flow accounting, is that it provides more cost factors to be considered for planning and decision-making purposes.
Full cost accounting principles ensure that overhead and indirect costs, and past and future costs, are counted in a way that they are not in cash flow accounting. For example, the adoption of a new product typically requires overhead and indirect costs related to support services, such as legal counsel or technical training. Cash flow accounting would not measure those as costs for the new product, but full cost accounting would. In full cost accounting, past and future costs require the measurement of the expenditures required to either prepare the groundwork for a cost, such as purchasing land before building something on that land, or to pay for an initial cost further down the road, such as paying property taxes on the building ultimately constructed on that land.
Environmental and Social Costs
Environmental and social costs are types of indirect costs often associated with full cost accounting. In standard accounting, the costs that are projected to accrue, because of new pollution or depleted natural resources, would not be part of the analysis. However, full cost accounting principles calls for considering and including those costs. In a similar way, social costs, such as how a proposed project would impact local school classes and the need for a larger school budget, also would be counted.
Standard cash flow accounting differs from full cost accounting in that the latter counts the cost of a transaction beyond the initial expenditure. For example, the cost measurement in the purchase of an item is not simply viewed as the amount that was paid for the item. Instead, the cost encompasses the purchase price as well as the cost of owning that item in subsequent years, according to an explanation of full cost accounting from the Environmental Protection Agency. This approach allows planners and others to see how a transaction could affect not only the current budget but future ones.
Full cost accounting integrates opportunity cost into its structure of calculation, according to a recent paper published by the University of Florida Extension Agency. This form of accounting not only notes the direct cost of a product or service, but the cost of not spending that wealth on a different opportunity. It also requires a measurement of products or services that cannot be accomplished because of a choice that is made. For example, if a local government elects to conserve a piece of public land, full cost accounting would calculate the possible revenue losses of not choosing a more lucrative path for the land.