full cost accounting

full cost accounting

Exploring the Importance of Full Cost Accounting in Modern Business Practices

1. Introduction to Full Cost Accounting

The technicalities are complex: in crude terms, traditional managerial or financial accounting records just the direct, variable costs of a business’s activities while full cost accounting records not just the direct, variable costs but also the indirect, non-variable costs of those activities. The principle behind this account is that those costs that are indirect to a product should be included in the cost of that product if the economic agent responsible for the product has control or substantial influence over the cost incurrence. The idea of full cost accounting is a very old one. In 1879 in Principles of Political Economy, for example, John Stuart Mill, strongly objected to the economic convention of his day.

When business leaders find themselves in conversations with outsiders – be those members of the government, of the media or of their local community – they are increasingly likely to be confronted with concerns not just about their organizations’ profiting but also about their ability to generate that profit within the context of sustainable development (by meaning things such as minimizing emissions, conserving resources, and upholding human rights). Notoriously, business leaders do not much enjoy such conversations. That difficulty increases when the conversation involves a formidably technical topic like accounting (as indeed it often does); but it can be worse still if the type of accounting under discussion is a particularly little-useful type like the one in bold letters above. Not only non-accountants but also those accountants and others who are responsible for the budgeting, the capitalization, and other financial decision systems in organizations are often not particularly happy to talk about full cost accounting.

2. Key Concepts and Principles of Full Cost Accounting

To illustrate full cost accounting in practice, this section presents an example of two methods that measure the combined results of a hypothetical cutting/transmission structure. The example demonstrates how full cost accounting influences accounting principles, like the period for using expenses that yield benefits, and how long your assets will likely remain in good condition. The example also discusses how full cost accounting can help you compare building construction alternatives based on the cost of providing position functions. Although the example suggests that the best method for making this comparison is to generate physical data from available structures, other methods are also available.

Guideline 1: As incorporating all revenues and costs into your business’s accounting process can enable you to make critical decisions for reaching optimal business performance, this section explains the theory and method of full cost accounting. In its simplest form, full cost accounting involves adding up all revenues, including direct and indirect expenses, to gather a picture of the full earning potential of each aspect of a business. Unlike standard accounting techniques that determine revenues and costs related to the construction and operation of each structure as separate revenues and expenses, full-cost accounting combines all the structures’ revenues and expenses to generate a single figure that accounts for combined costs and revenues.

3. Benefits and Challenges of Implementing Full Cost Accounting

While increasing the relevance of cost estimates must be of critical importance to decision making, it is certainly not inevitable that such an increase can be accessed by FCA as an aid to policy formulation or evaluation. Conversely, increasing the relevance of cost estimates will always involve costs. The principal cost that must be paid is an important investment in the development of economic and ecological scientific knowledge that can provide meaningful input to bring full cost accounting into the information network to be considered in conscious selection of the policies to be imposed or evaluated. The implications of such an investment are that business and government agencies that generate or utilize information about the environmental cost of economic activities would carry an implicit liability on their balance statement or bottom line as a direct cost of securing sensemaking accuracy.

Of particular importance in the use of full cost accounting is the realization of the minimum price that must be received for a product if costs are not to reduce the firm’s capital. The change in the determination of products to produce from accounting-derived costs to economic-derived costs can have far-reaching implications. But the accounting benefits that arise in exploring the full costs of production do not come without a cost. Counting the full cost of a product requires investigation into how resources should be managed.

Taking into account both the advantages and disadvantages of implanting FCA, it is to be borne in mind that wise use of such accounting will never be a guarantee of success, but it can be a useful tool for any organization. The main merit of full cost accounting is that it presents management with information about the cost of products that corresponds more nearly to the use of resources required to produce it. With this information, management is less prone to make the mistake of making choices of products to produce or sell and customers to serve based on the implications of the accountant’s information that are at variance with economic realities.

4. Case Studies and Real-World Applications of Full Cost Accounting

Much of the work in the full cost accounting area has examined environmental costs. In response to this, as well as raising awareness and developing future capabilities, accountants have developed structured new frameworks, guidelines, and tools. Case studies have focused upon sectors such as construction, electrics, engineering, transportation, textiles, and private and utility water companies, among others. Some companies have utilized full cost accounting in a comprehensive way, integrating it into the mainstream reporting systems. The relevance of full cost accounting applies especially to PPPs, natural monopolies and other infrastructure companies, and momentum has been initiated to incorporate sustainability concepts.

Over the past decade, research and practical work into the implementation of full cost accounting has flourished in response to the increasing emphasis upon the socio-environmental accounting aspect of companies. A pragmatic approach has been taken by the AccountAbility and the Stockholm Environment Institute. Drawing upon the identification of practical business advantages, consideration from both methodological and practical perspectives as to how indirect socio-environmental and direct socio-environmental – including insurance, regulatory and risk management costs – socio-economic, and opportunity costs may be determined in line with accounting analysis is presented. Other important focuses are legislations, the involvement of wider audiences, and the relationship between management accounting initiatives and financial accounting frameworks.

5. Future Trends and Innovations in Full Cost Accounting

Before concluding, it is important to recall that technologies embody social ordering. The market formed business corporation allocates the easement of business judgment to a self-interested management team. When managers use full cost accounting, they will make more conscientious decisions. In other words, full cost accounting is not just a reflection of the social acceptance of social values. The concept of shareholder value and its corollary, managerial discretion, which require interpretation of the fiduciary duty as shareholder wealth maximization and give the benefit of the term to corporate managers, while only privily encountering marginally legal limitations and regulatory constraints, shape attorneys-in-fact – appointed by the principals from a list that limits the competition to promoting only the single most important interest that other people regulate through use of the services of legal “depots” selected and organized by their management team agents.

Just as modern sustainable business practices are not confined to a single sector or industry, future trends and innovations in business practices generally can and likely will take many forms. As to full cost accounting specifically, emerging trends and innovations include mechanization of costs and benefits, the development of comprehensive accountability mechanisms, new metric form design, shifting comprehensive contracts from the constitution-making costs of organizational decision-makers to the beneficiaries of collective decision-making, anticipation of the increasing predictability of the pointing function of the price system, and reorganization of liability for waste streams. Importantly, other trends provide a backdrop and impetus for improvements to full cost accounting, including increasing internal transparency, the transformation of law and regulation into composable elements, and the understanding of law as applications of legal technology performed by legal service organization.