Why full costing matters to a first-time founder
A price that covers materials and labour can still lose money after rent, software, supervision and other overheads. Assigning those costs exposes the longer-term economics of each offer. The result depends on a sensible allocation method, so apparent product profitability can change when the allocation basis changes.
Examples of full costing
A workshop makes 1,000 lamps. Materials and production labour cost $24 per lamp, while factory overhead totals $12,000. Allocating that overhead across the lamps adds $12 each, producing a full cost of $36 per lamp before any desired profit margin or selling expense.
Common misunderstanding
It does not mean every possible business cost must be included in every decision. Full costing allocates direct and indirect production costs, while a short-term decision may focus on incremental costs. It also calculates cost rather than automatically setting the final price, which customers and strategy still influence.
When to use it
Use it for product profitability, inventory valuation where applicable and prices that must recover shared costs over time. Document how overhead is allocated and test whether volumes make the result unstable. For a one-off order with spare capacity, also examine incremental cost before accepting or rejecting it.