CHAPTER 11 Costing and pricing in an entity 471Determination of full cost
The identification of the indirect cost pools and related cost drivers enables the determination of the
full cost for the desired cost object. Figure 11.4 illustrates the process to determine the full cost for any
cost object. As mentioned earlier, the level of sophistication of the costing system, that is, the number of
indirect cost pools, the classification of indirect cost pools, and the cost drivers selected, will be at the
discretion of each entity and determined by its information needs.
Trace via source
documentationAllocated via
cost driverIndirect costDirect costCost objectF I G U R E 11. 4 Overview of a simple costing system to determine the full cost of a cost objectThe simple costing system in figure 11.4 highlights the tracing of the direct cost via source docu-
mentation and the allocation of the indirect cost based on the cost object’s use of the cost driver.
Figure 11.5 further refines this simple system, with the changes being seen in the breaking up of the
indirect costs into multiple cost pools (including salaries, rent and insurance).
Depending on the purpose of the costing exercise, the costing system can be structured with the
indirect cost pools broken down further, for example, by department or activity. The decision on how
best to structure the costing system will be dependent on management’s information needs, con-
straints placed by external parties and financial constraints within the organisation.
Note that this process can be used to cost any cost object. The determination of a full cost using
business units as the cost object of interest is demonstrated in illustrative example 11.2. This high-
lights the cost assignment process. Illustrative examples 11.3 and 11.4 show the structure of a costing
system used in manufacturing entities to determine the inventoriable product cost for financial
reporting purposes.