Full product cost definition
/What is Full Product Cost?
Full product cost refers to the assignment of both direct costs and indirect costs to a product. This means that direct materials , direct labor , and overhead are included in the cost. Full product cost is needed for two reasons, which are:
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The cost of inventory that is stated on the balance sheet must include all three costs, as required by the major accounting frameworks .
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The full product cost is used as the basis for setting long-term product prices, so that all possible costs will be recovered through product sales .
Example of Full Product Cost
As an example of full product cost, a manufacturer of wooden tables has incurred the following costs for its popular trestle table model:
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Direct materials cost . $50 for wood, $5 for nails, screws and glue, and $10 for varnish and paint. Total is $65.
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Direct labor cost . 3 hours by carpenter at $25/hour. Total is $75.
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Manufacturing overhead cost . Allocation of $17 per table.
This results in a total product cost of $157, which includes both variable costs (materials and labor) and allocated fixed costs (overhead).
When Not to Use Full Product Costing
The full product cost may be ignored when setting short-term incremental prices, typically for special deals. In this case, only variable costs are used to set a threshold for the lowest price that may be charged. Management can then set a price above this threshold in order to earn a profit. This variable costing approach is not recommended when setting long-term prices with established customers, since the resulting contribution margin will not cover a firm’s fixed costs.
