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Full Costing

Full costing takes the overheads of the business and allocates them according to a single criterion. The firm may choose to allocate overheads using one of the following:

  • Employees
  • Area
  • Sales revenue
  • Output volumes

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A B C
$ $ $
Revenue 200 000 160 000 170 000
Direct costs
Raw materials 30 000 40 000 40 000
Wages 80 000 60 000 60 000
EMPLOYEES 100 50 50
AREA (%) 40 20 40
SALES (% of total) 30 30 40
COMPUTERS 20 40 40


Indirect costs (FC/IO) $
Rent of factory 40 000
IT costs 20 000
Catering costs 6 000
Administration 4 000
HRM 10 000
Marketing 20 000
Total FC/IO 100 000


Allocation of fixed costs/indirect overheads in proportion with:

1. Employees (ratio 2:1:1)

A B C
$ $ $
Revenue 200 000 160 000 170 000
Direct costs
Raw materials 30 000 40 000 40 000
Wages 80 000 60 000 60 000
Indirect costs
Employees (2:1:1) 50 000 25 000 25 000
Total costs 160 000 125 000 125 000
Profit 40 000 35 000 45 000


2. Area ( ratio 2:1:2)

A B C
$ $ $
Revenue 200 000 160 000 170 000
Direct costs
Raw materials 30 000 40 000 40 000
Wages 80 000 60 000 60 000
Indirect costs
Area (2:1:2) 40 000 20 000 40 000
Total costs 150 000 120 000 140 000
Profit 50 000 40 000 30 000


What these results show is that the choice of allocation using the number of employees or using the relative area dramatically affects the relative profitability. Product C goes from being the most profitable product using the workforce to allocate fixed costs/indirect overheads to being the least profitable using the production area.

Evaluation of full costing

All the overhead costs are totalled and then divided according to the selected criterion. This method is simple to use and, therefore, cheap to administer. It ensures that all the costs are allocated and paid for. However, it may result in some clear anomalies. For example, if the value of sales is used to allocate overheads, a small department of only 10 staff, but with high sales revenues, may be allocated the same charge for catering costs as much larger departments of several hundred.