Full cost accounting is a measurement tool companies use to collect, present, and analyze financial information. Rather than simply report regular financial figures from a company, this accounting method takes into account both internal and external information for business decisions. Three areas are the focus of full cost accounting: environment, economy, and society. Additionally, this accounting method relies heavily on opportunity cost analysis. Opportunity costs are related to the second-best option or decision a company makes in regard to its business operations when choosing among several closely-related options or decisions.
Companies use full cost accounting for internal rather than external purposes. This accounting method is closely related to management accounting, which reports information relating to business costs and the allocation of these costs to produced goods and services. Full cost and management accounting both provide information relating to a company’s infrastructure, which is why the environment is included in full cost accounting analysis. Companies consider the environment in business decisions because of the heavy government regulation and taxes associated with this area. Natural resource depletion, pollution, and avoidance of protected areas are a few environmentally related concepts that can affect companies. Failure to accurately define the environmental responsibility of a company can increase operating costs.
The economic considerations of full cost accounting are a traditional part of accounting procedures. Companies consider information like consumer demand, available credit, number of competitors, cost of resources, and international economic markets are common economic factors. Each of these items can directly impact how a company operates and the amount of profit available in different economic markets.
Society is the third aspect of full cost accounting. Business owners and managers consider the societal effects of decisions because creating public distrust or violating the ethics deemed important by a group of citizens can lead to lower market share and fewer sales. Large organizations with an economic presence in various economic markets must consider the societal impact of their operations in each country. What one country sees acceptable, another may not. Failing to consider independent actions can lead to difficult business situations in one or multiple international markets.
The concept of an opportunity cost occurs when companies only have enough resources to choose one opportunity out of several options. Owners and managers must decide which opportunity makes the best use of limited resources in the economic market. For example, a company has the opportunity to sell widgets for $15 US Dollars (USD) for a limited time or gadgets for $12 USD indefinitely. If the company decides to produce widgets, it will sacrifice or deny the opportunity to sell gadgets indefinitely. Owners and managers can use full cost accounting to determine which opportunity is best for the company.