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
| 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.
