Full product cost refers to the assignment of both direct and indirect costs to a product. This means that direct materials, direct labor, and overhead are included in the cost. Full product cost is needed for two reasons, which are:
- The cost of inventory that is stated on the balance sheet must include all three costs, as required by the major accounting frameworks.
- The full product cost is used as the basis for setting long-term product prices, so that all possible costs will be recovered through product sales.
The full product cost may be ignored when setting short-term incremental prices. In this case, only variable costs are used to set a threshold for the lowest price that may be charged.