Full Costing of Absorption Costing

Full costing, also known as absorption costing, is a method that is founded on the
allocation of fixed overhead costs on all units (Gersil & Kayal, 2016). The method treats all costs
of production as product costs. The implication is that both variable and fixed costs are all
treated as product costs. The method aims to arrive at the cost per unit of production. Edison
Electric can use full costing or absorption costing when undertaking external reporting (Gersil &
Kayal, 2016). The main advantage of full costing is that it complies with Generally Accepted
Accounting Principles (GAAP). Another advantage is the fact that it is highly accurate in
tracking profits (Gersil & Kayal, 2016). One major disadvantage is the fact that it cannot be used
to make improvements to the operations of a company. It may also create a picture of a
company’s profitability being better than it is.
Variable Costing
Variable costing is a system that treats costs of production that vary with output as
product costs. The method thus allocates variable costs to inventory. It is best suitable when a
company is undertaking internal reporting (Gersil & Kayal, 2016). The method is advantageous
since it helps in analyzing the impact of fixed costs on the net profit. It is also useful in planning
and control (Gersil & Kayal, 2016). One major drawback of the method is the fact that it
separates fixed and variable costs. Product costs are not entirely dependent on variable costs.
Target Costing

UNIT 2 INDIVIDUAL PROJECT 3
Target costing is a method where costs are defined by existing market conditions. It is
mainly a management technique that takes into account various factors such as the level of
competition (Swenson et al., 2003). The method can be used in the planning process. One
advantage of target costing is the fact that it allows the management to plan effectively. The
management can plan for cost management as well as cost reduction. The product is also created
based on the needs and expectations of the consumer (Swenson et al., 2003). The consumers are
central to this method, and this makes them feel valued. One drawback is that a company may
have to make substandard goods in a bid to ensure that it achieves a reduction in costs.
Life Cycle Costing
Life cycle costing is a method that estimates the money that will be spent on an asset over
the course of its useful life. It covers the period between the acquisition of an asset and its
disposal (Woodward, 1997). The costs that are factored in include initial investment, annual
recurring costs, and other additional investments. One advantage of lifecycle costing is the fact
that it enables the management to look at the full budget. The management is able to take into
consideration all expenses and revenues associated with an asset (Woodward, 1997). The method
is highly based on estimates. The implication is that the estimates could be subject to various
changes.
Activity-Based Costing
Activity-based costing assigns the cost of each activity based on the actual consumption.
Indirect costs and overhead are therefore assigned to the related products and services. It assigns
costs in a less arbitrary manner compared to other costing methods (Javid et al., 2016). The main
benefit of this system is that it assigns costs to activities. However, the method is time-

UNIT 2 INDIVIDUAL PROJECT 4
consuming, and in some instances, it is difficult to assign costs to activities. In addition, the
method falls short of conforming to GAAP.
After your research is completed, provide a recommendation on which costing method is
the best for the growth of EEC
The best method that EEC can use is absorption costing. The method conforms to GAAP
and is not associated with many drawbacks. In addition, it is not time-consuming.

UNIT 2 INDIVIDUAL PROJECT 5

References

Gersil, A., & Kayal, C. (2016). A Comparative Analysis of Normal Costing Method with Full
Costing and Variable Costing in Internal Reporting. International Journal of
Management, 7(3).
Javid, M., Hadian, M., Ghaderi, H., Ghaffari, S., & Salehi, M. (2016). Application of the
activity-based costing method for unit-cost calculation in a hospital. Global journal of
health science, 8(1), 165.
Swenson, D., Ansari, S., Bell, J., & Kim, I. W. (2003). Best practices in target
costing. Management Accounting Quarterly, 4(2), 12-12.
Woodward, D. G. (1997). Life cycle costing—theory, information acquisition and
application. International journal of project management, 15(6), 335-344.