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Full & Direct Costing

Full costing, or absorption costing, treats all costs - both variable and fixed - as product costs. It charges both types of costs to production and allocates fixed costs to products using an appropriate basis. This allows management to set selling prices to recover total costs. In contrast, marginal costing ignores fixed costs and only considers variable costs for determining selling prices. While marginal costing focuses on short-term recovery of variable costs, absorption costing's objective of recovering total costs is more appropriate for long-term management. Both costing methods have a role to play depending on the situation.

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85 views2 pages

Full & Direct Costing

Full costing, or absorption costing, treats all costs - both variable and fixed - as product costs. It charges both types of costs to production and allocates fixed costs to products using an appropriate basis. This allows management to set selling prices to recover total costs. In contrast, marginal costing ignores fixed costs and only considers variable costs for determining selling prices. While marginal costing focuses on short-term recovery of variable costs, absorption costing's objective of recovering total costs is more appropriate for long-term management. Both costing methods have a role to play depending on the situation.

Uploaded by

vsrajeshvs
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Full & Direct Costing

Full Costing
FullorAbsorptionCosting,asthenameindicates,absorbsbothvariablecostsandfixedcosts.All
costsaretreatedasproductcosts.Underabsorptioncosting,allcosts,bothvariableandfixed,are
chargedtotheproductsforcostdetermination.

InAbsorptioncosting,thereisnodifferencebetweenfixedcostsandvariablecostsfortreatment.
Botharechargedtoproductionintheyearinwhichtheyareincurred.Fixedcostsareapportionedto
differentproductsonasuitablebasis.Inotherwords,allcostsarechargedtoproductionfor
determiningthesellingprice.However,inMarginalcosting,fixedcostsareignoredandonlyvariable
costsareconsideredfordeterminingthesellingprice.

Theobjectivesofmarginalcostingandabsorptioncostingareconflictingwitheachother.

Undermarginalcosting,managementisconcernedwithrecoveryofvariablecosts.Thisisashortterm
objective.Anymanagementforalongperiod,permanently,cannotsustain,ignoringrecoveryoffixed
costs.

Underabsorptioncosting,managementisconcernedwithrecoveryoftotalcosts.Unlesstotalcostsare
recovered,managementdoesnotcontinueproductionoftheconcernedproduct.Basically,thisisa
longtermobjective.

AbsorptionCostingandMarginalCostinghavetheirownroletoplay,dependingonthesituation.

Direct Costing
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