What is Full Cost?

Full cost is the aggregation of all costs associated with a product or other cost object. These costs include both the direct costs and indirect costs of production, but do not include selling, general and administrative expenses. The cost assigned to inventory when it is reported in a company’s balance sheet is its full cost.

How to Use Full Cost

The full cost of a product is used as the minimum threshold for setting the long-term price of a product; the intent is to set price points that will ensure that a company’s costs will be completely offset by the resulting revenues. Otherwise, price points are likely to be too low, resulting in excessively low profits over the long term.

Businesses sometimes set short-term prices lower than their full cost, but higher than their variable cost, in order to earn an incremental profit on special orders where customers are demanding unusually low prices on one-time deals. These arrangements only work when a business has excess production capacity to manufacture the requested items.