Glossary
Full costing
A costing method that includes all costs — direct, indirect, and overhead — in a product's cost. The most complete way to know what something really costs you.
What is full costing
Full costing (or absorption costing) is an approach to cost calculation that allocates all costs needed to produce and deliver a product or service: materials, labor, energy, depreciation, and a share of the company's general overhead.
It's the most complete method for determining real cost, and it's essential for understanding whether a product generates a positive or negative margin.
How it works
Full cost is built in three layers:
- Direct costs — materials + labor directly attributable to the product
- Indirect production costs — energy, depreciation, maintenance, scrap
- General overhead — administration, sales, logistics, rent
Indirect and overhead costs are distributed across products using an allocation basis (machine hours, labor hours, revenue).
For a practical example with real numbers, read how to calculate the true cost of a product.
When it's needed
Whenever you need to set a price, evaluate a discount, or determine whether a job is profitable. Without full costing, you risk selling at a price that doesn't cover costs.
Learn more: Margin | Fixed and variable costs