Full Cost Systems: A Comprehensive Guide

Unit 7: Full Cost Systems

Introduction

This unit explores full cost systems, assuming that manufacturing processes consume resources to perform tasks. The costs of these resources are accumulated to determine the cost of the centers. Variations in this hypothesis lead to different systems:

1. Unnecessary Resource Consumption: Some resource consumption might be deemed unnecessary and accounted for as a period loss, not a production cost. This leads to distinctions between traditional and economical full costing.
2. Resource Cost vs. Accumulated Cost: The cost of resources used in production might differ from the cost accumulated in the units produced. This introduces systems with predetermined rates like normal costing, imputation rationelle, and standard costing.
3. Direct Cost Assignment: Some resource costs can be assigned directly to products, bypassing allocation to a center or department. This is seen in job order and section full costing.
4. Final Full Cost Systems: These systems consider the entire process generating revenue, including functions beyond input transformation, unlike production full cost, which only considers resources used in transformation.

Accounting Plan Design

The accounting plan represents the computable aspect of accounting, transformable into algorithms. This model assumes:

1. Traditional full costing is a specific case of economical full costing, with financial accounting criteria.
2. Section full costing is a specific case of job accounting, without direct costs.
3. Historical full costing is a specific case of predetermined-rate costing, where actual applied resource cost is accumulated using predetermined rates.
4. Production and final full costing analyze profit differently, resulting in varying final costs and margins.

Spoilage and Inventory Losses

Classification

Inventory losses, the difference between calculated and real stocks, arise when inventory quality degrades, impacting market value. They are classified as:

1. Losses: Quantity reduction due to events outside the transformation process.
2. Spoilage/Defective Units: Finished products not meeting quality standards.
3. Scrap: Materials not incorporated into products.

Change in Inventories

Analyzing inventory changes is crucial for two reasons:

1. Relevance to overall production costs.
2. Management of production processes.

Distinctions exist between:

1. Normal Differences: Result from efficient production, reducible only through different, currently uneconomical techniques.
2. Extraordinary (Abnormal) Differences: Result from abnormal conditions (e.g., negligence, low feedstock quality, inappropriate production rhythm) and are potentially manageable.