Full cost accounting

Full cost accounting is defined as a measurement tool companies use to collect, present, and analyze financial information. This accounting method describes how goods and services should be priced to reflect their true costs (including environmental and other social costs). It is an accounting method which considers which recognizes economic, environmental, health, and social costs of an action or decision. Full cost accounting is a model that provides details on all the costs associated with producing a product or a service. The full cost accounting method considers both internal and external information for business decisions.

With full cost accounting, natural resources are taken into calculations of a country’s GDP; natural resources would be redefined as assets on company ledgers; and environmental costs would be built into a product’s cost. Full cost accounting is used either the full private (or bottom line) costs to an enterprise of an activity, or the full social costs to society of the activity including externalities (such as health impacts resulting from ozone depletion).

The full cost accounting method is related to management accounting, which reports information relating to business costs and the allocation of these costs to produced goods and services. Both the accounting methods provide information relating to a company’s infrastructure, which is why the environment is included in full cost accounting analysis. The economic considerations of this accounting are a traditional part of accounting procedures.  

Information provided like consumer demand, available credit, number of competitors, cost of resources, and international economic markets are considered by companies and are common economic factors. These have a direct impact how a company operates and the amount of profit available in different economic markets. Full cost accounting gives a better idea about the full costs of the products. It helps in better management of the internal costs and leads to good decision making.

Questions

• What is a full cost accounting?
• How is full cost accounting helpful to the companies and the economy?