Full Costing and Variable Costing Essay Example | Topics and Well Written Essays - 2000 words

Full Costing and Variable Costing - Essay Example Cost Accounting: A 12 Managerial Emphasis. 12th ed. Prentice Hall. 12 Elliott Taylor, 2011. Full-Costing Income Statement vs. Variable-Costing Income Statement. [online] Available at [Accessed 25 December 2011] 13 Jae Shim, Joe Seigel, 2011. Schaum's Outline of Managerial Accounting. 2nd ed. McGraw-Hill. 13 John Simms, 2008. The Variable Costing Income Statement for External Reporting. VDM Verlag. 13 Noah P. Barsky, Anthony H. Catanach, 2004. Management Accounting: A Business Planning Approach. South-Western College Pub. 14 Steven M. Bragg, 2011. Cost Accounting Fundamentals: Essential Concepts and Examples. 2nd ed. Accounting Tools. 14 Executive Summary Full Costing and Variable Costing are two common approaches to cost keeping employed at the management accounting level in various firms across the globe. Both approaches have their pros and cons and making a choice between the two is solely dependent upon the practices of the firm, its approach to create shareholder value and the m indset of its employees. In terms of the treatment of different types of cost, there is only one difference between the two approaches under consideration. The Manufacturing Overhead component of cost is treated in a different manner under both the approaches. The fixed component of the Manufacturing Overhead is absorbed by the product as it is treated as a product cost in Full Costing approach while the same component is treated as a period cost under the Variable Costing approach. This different treatment of the Fixed Manufacturing Cost, poses a positive effect on the bottom line of the company in the Full Costing Approach, as the cost incurred on the goods not sold is not deducted from the revenues generated during the relevant period. When it comes to Variable Costing, the costs incurred over the manufacturing of all the produced items are deducted from the revenues of the relevant period. This tends to shrink the company bottom-line for the immediate period. These two approache s thus influence the mindset of the shareholders and stakeholders of the company. The type of approach to costing adopted by the company shall also depend on the industry that it operates in and the shareholder anticipations as well. Introduction The ultimate objective of the commencement of any business is to generate profits. A simple equation that generates the bottom line of any business entails the deduction of costs from revenues of the company. Revenue calculation is not a Herculean task, and thus there are not a lot of distinguished approaches that can be used to calculate the revenue of the company. However costing is a much more complex and complicated component of the formerly mentioned equation. There are various approaches utilized by management accountants and financial analysts across the globe for the computation of the cost components. Each component has its own justification and rationale and this paper will be specifically aimed at discussing two of the most utili zed approaches to costing namely Full Costing and Variable Costing (Garrison, Noreen, Brewer, 2009). Main Findings In general, no matter whichever approach to accounting is used by the accountants for the treatment of the cost factors in the financial