Full cost definition
/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.
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Example of Full Cost
A company manufactures custom wooden furniture, specifically a dining table. To determine the full cost of producing one table, the company aggregates both direct and indirect production costs, excluding selling, general, and administrative (SG&A) expenses. It does so using the information noted below.
Direct Costs:
Direct materials: Wood and hardware costing $150 per table.
Direct labor: Wages for carpenters at $80 per table.
Indirect Costs (Manufacturing Overhead):
Factory rent: Allocated at $20 per table.
Utilities: Electricity and heating costs allocated at $10 per table.
Depreciation of equipment: Allocated at $15 per table.
Calculation of Full Cost:
Direct materials: $150
Direct labor: $80
Factory rent: $20
Utilities: $10
Depreciation: $15
Total full cost per table: $275
In this example, the full cost of producing each dining table is $275, which includes all direct and indirect manufacturing costs but excludes SG&A expenses like marketing and administrative salaries. This comprehensive cost view helps the company price its products effectively and assess their profitability.