There are two most frequent cost allocation models in the business structure: the full cost or full costing and direct costing or direct cost. Would you know how to differentiate them? In this article we will tell you the keys so that you know how to differentiate them.
If you want to learn more about cost models and accounting or financial management, don’t forget to take a look at the Financial Management Course that we offer you at Formación. Add value to your resume with specialized training! But first, we tell you what is the full cost model, its characteristics and how to differentiate it versus direct cost.
Full cost model or full costing: what it is
Let’s start by explaining what is cost. The cost is the monetary value of the expenses in raw material, equipment, labor, supplies… etc., necessary in the production chain of a product or service. That is, the cost is not the same as the expense, since not all expenses give rise to a cost. Only those related to production are considered business costs, which means that they are essential for its execution and development.
Therefore, the cost model is the proportion that is part of the cost of the product or service.
Choose one model or another It will depend on factors such as values, objectives, main market, business structure and economic capacity.
The full cost model offers companies a full cost information that are generated in the manufacturing, production and sale process. This system associates a specific expense with a certain process, phase of the productive process, product or service to try to reduce its cost. In this wayand optimize and improve profits.
Full costing characteristics
Now that we know what the full costLet’s go with your main features! These characteristics also represent its greatest advantage over other types of models, such as direct costing, which we will see in the next section. But now write down your competitive advantages:
- The cost model allows analyzing the cost for the company based on the output. This is a volume that must be analyzed previously. That is, we will always have to analyze the costs in general based on an order.
- It allows compare the final cost of a product with the selling price and thus calculate its possible profitability.
- establishes a real stock valuation of products, both finished and in the production/manufacturing process.
- Examine the cost accounting.
- It allows a comprehensive analysis of the effect on costs.
- Reduce fixed costs of companies.
- Complete chain control of production.
How does full costing differ from direct costing?
The main difference between one model and the other is in the way in which they consider the fixed production overhead costs. Meanwhile he full cost If you consider fixed overhead costs as a product cost, the direct costing It does not include product costs.
He direct costing offers the company information about the product in relation to costs from different perspectives: assigns direct costs to a certain product and indirect costs to the entire production process.
With direct costing, the company analyzes the costs in the same exercise and manufacture of a product, while in full costing the costs associated with the entire production system are analyzed.
Therefore, we can establish that the difference is in the form of analysis:
- full cost analyzes the total cost, obtained by the difference between the sale price and the total cost.
- direct costing analyzes the direct and indirect costs in the manufacture of certain products.
Both analysis systems analyze the costs of production, distribution and administration. The difference is in how the direct cost analyzes direct and indirect costs with a examination of all variableswhether or not they directly affect the product.
The two systems are valid and efficient to analyze the cost that the production process supposes for a company, and in this way anticipate the cost in order to obtain more profit margin.
It is very important for companies to try to control and know their costs, since it can mean the difference between being competitive in the market or not. Although we know that these are difficult concepts to understand, we would like to know, did you know about cost control systems such as Full Costing? Do you think it is important for companies to invest in this type of cost control system?
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have a exhaustive and meticulous control of the different costs involved in the manufacturing and production chain of a product or service is essential to avoid losses and keep the accounts up to date. For this reason, there are many professional profiles demanded by companies with experience and/or training in areas such as Accounting and Finance. Do you want to know more about accounting and be part of a key department?
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The 200-hour training program and the complementary teaching resources will enable you to acquire knowledge in areas such as Economics, Finance, Treasury, Accounting, Administrative Management, and of course you will learn more about the different models and types of cost!
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