Total absorption costing

The full cost accounting refers to all those systems of cost accounting in which all costs are charged to cost units. It is thus in contrast to the costing.

Objectives

The full cost accounting aims to determine the cost effective or planned incurred a cost object ( product, service, product ). In addition to the economics of the manufacturing process controls and a statement of income are possible.

Expiration

Typically, in the full- cost accounting to differentiate the types of costs which is then used in direct costs and overhead costs, and then to charge using the cost center accounting overheads after the principle of averages over more or less differentiated charge rates to the cost object (product, product ).

Like all cost accounting practices is the retrospective analysis of full cost accounting for the lack of binding to the already elapsed process unsuitable to allow a controlling intervention in an ongoing operational events.

Criticism

Main criticism of the absorption costing is that in this method, the cost will be charged regardless of the causation of the costs (in particular the output quantity ) to the cost objects ( Fixkostenproportionalisierung ). For example, the fixed depreciation costs are allocated a breakdown product, although these costs are incurred completely independent of whether the product at all, and if so, is produced in what quantities. Furthermore, I argue that a cause-related billing of overheads does not take place. As a further point of criticism is that the variability of the fixed costs is not noticed over the course of time ( If the time coordinate are high enough all costs variable ).

For allocation of costs determined on product prices is still a risk that the current market prices exceeded what the sales achieved fall so that the folded to the product cost can continue to grow - and ultimately causes a downward spiral.

As an instrument for preparation of short-term ( operational ) decisions, the full cost accounting is not suitable. Due to the exclusive use of actual costs based on historical performance and the inclusion of irrelevant surgically fixed costs of providing sound planning of cost is excluded. A subsequent analysis of the causes of cost variances is due to lack of plan costs simply impossible.

Counterarguments

The advocates of full cost accounting, however, argue that a company, in order to survive in the medium to long term can cover all the costs through its sales must (long-term price floor ) and therefore all costs to assign its products. The full cost accounting is mostly used for closed fiscal years to get an accurate overview of the contribution of the cost object.

A bill on a part- cost base can entice that you continue offering cost carrier, although they would not be worth taking into account the total cost or promotes products, which are less profitable than others.

Example: A company is faced with the question of which of its two products should be promoted more in the future. The headquarters ( administration with logistics center ) costs € 100 tons / year. Product A causes 20 % of the cost, product B 80%. A product has a contribution margin (CM ), after deducting the direct costs of € 160t, 200t of product B €. If one were now the central administrative costs proportionally credited (ie full cost accounting ), it would now be a product A DB of € 140t ( 160t - 20t € € ) and product B € 120t ( 200t - 80t € € ). Under the full cost accounting would therefore promote product A. But not Taking into account the fixed costs, so product B would be encouraged.

The full cost accounting is therefore essential for long-term planning.

Practical relevance and case law

Despite fierce decades of criticism of this method, the full cost accounting is the most common cost accounting practices in its various variants today. According to IAS / IFRS are production costs, such as in the valuation of inventories (IAS 2) or of the fixed assets (IAS 16 ) by the method of full costs to be determined. That is, there are all of the production attributable overheads involved.

The Court has dealt with issues of full cost accounting. The imperial court was - at least in times of war - assumed the full costs and a profit margin in the determination of a reasonable price. The Federal Court refused, however, in the determination of the infringer, the full cost model, but approve only a portion of overhead costs ( overheads only with a direct relation to the service provided ) and all direct costs to. May not be taken into account fixed costs, which would be " anyway " incurred as a pure willingness costs. The judgment had become possible only since then had enforced the costing in business administration.

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