Approaches to Costing: Full and Contribution
What are the main differences between full costing and contribution costing?
Full costing considers both variable and fixed costs in product costing, allocating a share of fixed costs to each unit. Contribution costing only considers variable costs and focuses on the contribution margin per unit to cover fixed costs and generate profit.
What are the advantages and disadvantages of using full costing method?
The advantages of using the full costing method include considering all costs, providing a comprehensive view of the cost structure, supporting pricing decisions, facilitating financial reporting and analysis, and aligning with generally accepted accounting principles (GAAP). However, disadvantages include complexity, potential distortion of costs due to allocation methods, less flexibility in decision-making, and the risk of not reflecting true variable costs in short-term decision scenarios.