What is meant by the full cost of a product?

Many (perhaps most) accountants use the term full cost to mean the full manufacturing or production cost of a product. To these accountants this means a product's cost of materials, labor, and both variable and fixed manufacturing overhead. These accountants do not include selling, administrative, or interest costs in their definition of the full cost of a product. Their view is consistent with the way that inventory and the cost of goods sold are reported on a company's financial statements.

Some accountants use the term full cost to mean more than a product's manufacturing or production costs (including fixed manufacturing overhead). These accountants use full cost to mean the manufacturing cost plus an allocated portion of the company's selling, administrative, and interest costs. These accountants are concerned that some products require a larger portion of selling and administrative costs while other products require a small portion. Only when a product's selling and administrative costs are combined with the product's manufacturing costs will they be able to determine whether each product's selling price is sufficient or is aligned with its "full cost".

It is important to realize that the term full cost can have different meanings to different business professionals.