What is Full Product Cost?

Full product cost refers to the assignment of both direct costs and indirect costs to a product. This means that direct materials, direct labor, and overhead are included in the cost. Full product cost is needed for two reasons, which are:

The cost of inventory that is stated on the balance sheet must include all three costs, as required by the major accounting frameworks.
The full product cost is used as the basis for setting long-term product prices, so that all possible costs will be recovered through product sales.

When Not to Use Full Product Costing

The full product cost may be ignored when setting short-term incremental prices, typically for special deals. In this case, only variable costs are used to set a threshold for the lowest price that may be charged. Management can then set a price above this threshold in order to earn a profit. This variable costing approach is not recommended when setting long-term prices with established customers, since the resulting contribution margin will not cover a firm’s fixed costs.