Business – 5.4 Costs – Approaches to costing | e-Consult
5.4 Costs – Approaches to costing (1 questions)
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In full costing, all manufacturing costs – direct materials, direct labour, variable overheads and fixed production overheads – are allocated to each unit of output. The fixed overheads are spread over the total units produced, so the unit cost includes a portion of the fixed overhead.
In contribution costing, only variable manufacturing costs (direct materials, direct labour and variable overheads) are assigned to units. Fixed production overheads are treated as period costs and are expensed in full in the period incurred, not allocated to units. Consequently, the unit cost under contribution costing is lower because it excludes any share of fixed overhead.