The difference in these two approaches arises due to calculation of the costs that are related to the production of the products. In the full costing system the company includes all the costs that are probable that might be incurred in the future for the production of the particular goods. This calculation of the cost depends on the past experiences and performances of the company. As there is estimation in the calculations of full costing system, so there are chances of its deviation from the actual costs. The full costing system counts the fixed costs that are related that are incurred which may not be related to actual product. So full costing may result in overstatement of the costs and hence result in lesser net income. Furthermore in full costing system the administrative charges are also included which may not be specifically related to the production of product. Whereas in the actual costing method the administrative cost are not included because that are not related directly to the production of a particular product. In this way full costing system overstate the costs but it is more effective for showing the actual profitability of the company as a whole.
1. Why Net Income is different under full costing system and direct costing system?
2. Performance of Company over the last six months:
3. Advise for the President Regarding the Discounting Company proposal.
4. Recommendation of Costing System.