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Direct Costing and Full Costing

Direct Costing and Full Costing. Ted Mitchell. 2 Methods of Spreading Costs. 1. Full or absorption costing is to spread all non-traceable common costs across all areas of the business such as General overheads, Product Development, Salaries, Personnel, etc. 2 Methods of Spreading Costs.

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Direct Costing and Full Costing

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  1. Direct Costing and Full Costing Ted Mitchell

  2. 2 Methods of Spreading Costs • 1. Full or absorption costing is to spread all non-traceable common costs across all areas of the business such as General overheads, Product Development, Salaries, Personnel, etc.

  3. 2 Methods of Spreading Costs • 2. Direct Costing is to leave non-traceable common costs as a lump of business expenses to which profits from various SBU-Markets make contributions

  4. Example Product Development • New Shoes Game Product Development Budget is a decision made at the head office. Benefits are felt in all three SBU-markets!

  5. How should we allocate the product development cost between the marketing operations in the various markets?

  6. Example • With a full cost approach the cost of product development is allocated to each of the three SBU-Markets • Allocated by sales volume, Qby sales revenue, Rby gross profit, Gby direct labor, Vby proportion of advertising spentby market potential, potential Size

  7. Consolidated vs. Detail Reports Clicking a Region link opens a detail report (directly below the consolidated report). 7

  8. For Management Planning and Analysis Direct costing is a better approach.

  9. Full costing is • 1. Arbitrary makes some lines or SBU’s look better or worse than they should. • 2. Arbitrary allocation makes some managers look better or worse than they should. • 3. Confusing

  10. Direct and Full Costing • Use Direct Costing for • Calculating What lines are profitable. • Changing from Product A to Product B or dropping a line • Often Used for Full Costing for Calculating the Price Needed to cover all costs and target profit in a SBU/Market (But Cost Based Pricing Should Not Be Used Alone)

  11. For Pricing and Evaluation Purposes • The Best Cost Based Method is Direct Costing

  12. Consolidated vs. Detail Reports Clicking a Region link opens a detail report (directly below the consolidated report). 16

  13. The Direct Costing Method Provides the best measure of Marketing’s Immediate“4P” Contribution to profit for the period. • More Market Research, Product Development, Talented Ad agencies, Sales Training, etc. Help in the Long Run

  14. Any Questions on Direct and Full Costing?

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