• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Explain two methods of Full Costing together with a discussion of the advantages and disadvantages of each method.

Extracts from this document...

Introduction

Explain two methods of Full Costing together with a discussion of the advantages and disadvantages of each method The concept of full costing is not to look into individual costs, for example variable costs, but to look at the whole picture and all the costs that are associated with achieving some objective, i.e. making a product, or providing a service. The logic of full costing is that all of the costs of running a particular facility, for example a building, are part of the cost of the output of that building. For example, the rent is a fixed cost that will not alter if we only produce one unit, but if the building were not rented then there would be nowhere for production to take place, therefore rent is an important element in the cost of each unit of output. 'Full costing: Deducing the total direct and indirect (overhead) cost of pursuing some activity or objective' (Accounting: An Introduction, McLaney &Atrill (2002) ...read more.

Middle

In the long-run, for a business to make any profits, sales must cover all the product's costs. By including fixed overheads in the product's costs, the long-run sales price can be set to cover all costs, including fixed overheads. As we can see this is one of the major advantages in Absorption Costing, as it really stresses the importance of fixed costs. Also by allocating costs to the production units, Absorption Costing works out the entire production cost for a product. Absorption Costing is thought to be more appropriate for seasonal business, as it prevents the reporting of false or inaccurate losses. Although Absorption Costing is a recognised way for allocating costs to production, and is used by many industries today it does have its drawbacks. The predetermined rates imply to some managers that a fixed overhead is a variable cost. For example, if the predetermined rate for a fixed overhead is �5 per direct labour hour, it is possible to conclude (wrongly) ...read more.

Conclusion

From this information managers can also predict costs, profits and requirements associated with changes in production, structure and costs. ABC additionally tracks the costs of activities and the development of work through the business, highlighting areas of high expenditure. Managers are able to analyse results from ABC and discover the areas that need improvement. The drawbacks of ABC are also apparent, the whole process involved in ABC, i.e. analysis of overheads and identifying cost drivers is time-consuming and costly. It is argued that the cost and effort put into this process does not outweigh the benefits and so does not justify carrying it out. ABC is also criticised about its ability to provide relevant information for managers to carry out decision-making, as the results show past costs and not opportunity costs. 'Past costs are irrelevant in decision making and opportunity costs can be very significant, full costing information is an expensive irrelevance' (Accounting: An Introduction, McLaney &Atrill (2002) Page 329) Despite the drawbacks and criticisms of ABC and Absorption Costing, they are widely used in business today as a means of allocating direct and indirect costs to an activity or objective. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our GCSE Accounting & Finance section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related GCSE Accounting & Finance essays

  1. Unit 5 Introduction to Accounting

    While intangible assets don't have the obvious physical value of a factory or equipment, they can prove very valuable for a firm and can be critical to its long-term success or failure. For example, companies such as Coca-Cola wouldn't be nearly as successful were it not for the high value obtained through its brand-name recognition.

  2. Costs, Profits and Break-even Analysis.

    Its collection can therefore be expensive and time-consuming. However, it should be accurate and relevant to the business involved. The second refers to information that has already been collected. The data is comparatively cheap to acquire but might not be accurate or exactly that required by the business.

  1. What does Finance involve.

    (I have rounded up my �16619.61 number to �17,000 because it is easier to work with this number and it is easily remembered) Option 1: Borrow the money from the bank using my detailed business plan in order to help them decide whether or not I'm worth of getting a

  2. PEST Analysis

    Therefore, consumers must know how much extra they are paying in interest. The 'Fair Trading Act' set up the Office of Fair Trading whose main aims are to inform consumers of their rights, prosecute businesses which break the law and recommend to the Monopolies and Mergers Commission any business that need to be investigated.

  1. Financial Management

    This includes short term as well as long term capital. The sources of short term finances are: > Own capital > Borrowing/deposits from friends, relations and others > Spontaneous capital through credit facilities from vendors. > Negotiated credit i.e. short term loans on negotiated basis from commercial banks and finance agencies etc.

  2. Business and finance

    These are a simple and flexible way to save and invest for anyone who is 18 or over and resident in the UK for tax purposes. This is how they work. An ISA is a tax-free investment, the savings components in an ISA are as follows: * Cash - this

  1. This report has been produced as evidence for Unit 9 - 'Financial Services' - ...

    Standard savings accounts Most banks and building societies offer a standard savings account. Usually these require a minimum amount to be put away each month. Withdrawal conditions vary for each account but savers may find that they are offered limited access without penalty or a bonus if they refrain from making withdrawals.

  2. Management Accounting Cost Allocation - Graffiti/BBDO Sofia.

    Organizational Structure On the top of the agency is of course the CEO or as it is at BBDO the Managing Director. Then comes the administrative director, below are the directors of the other departments - the Client Service Director, the Creative Director, the Media Director, the production Director as well as the PR & BTL Director.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work