Full Costing
According to its name, full costing refers to determining the full cost of a subject. In particular, full costing can be described as assigning all variable and overhead costs to a chosen cost object (Hansen et al., 2021). The latter can be anything from stores, products, and services to customers and geographic regions.
Eddison Electronic Electronic Company (EEC) can use this costing method in case it has to conduct financial reporting under the Generally Accepted Accounting Principles framework or if it reports its income taxes (Hansen et al., 2021). However, full costing has substantial drawbacks in the form of low practical use outside accounting frameworks and other issues, such as high time consumption and inapplicability in incremental pricing.
Variable Costing
The variable costing method considers only the variable costs of the chosen inventory. According to Hansen et al. (2021), it does not include all overhead costs, assigning only their variable part to a cost object.
EEC could utilize variable costing in their internal reports, as it is greatly valuable in case there is a need for quick analysis during the decision-making process. However, a severe drawback of this method is its poor ability to match revenues with respective expenses (Hansen et al., 2021). Therefore, it is of no use when it comes to financial reporting.
Target Costing
Target costing is a specialized method to make predictions about a new product. Namely, it allows companies to plan for specific price points, product costs, and expected margins (Hansen et al., 2021).
In the case of EEC, there is little value for this costing method due to the company’s specialization in electricity provision. Target costing is essential for companies oriented toward innovation and new offerings as it helps maintain the short-term profitability of manufacturing. However, electricity as a product does not require constant updates, whereas geographical coverage and long-term profitability yield incomparably more value.
Life Cycle Costing
Life cycle costing is concerned with all the peculiarities surrounding the chosen asset. Hansen et al. (2021) define life cycle costing as a method that includes the costs of an asset throughout its lifespan, which includes initial and additional investments, recurring costs, and salvage value.
For EEC, life cycle costing can help determine the return on investment if they construct an additional power plant in a currently occupied state or expand their service to other states. The only potential drawback of this method is the required time and effort to conduct an extensive analysis.
Activity-Based Costing
Activity-based costing (ABC) is a method utilized to lower overhead costs. According to Hansen et al. (2021), by assigning costs to specific activities, ABC increases the precision with which overhead costs are allocated.
This approach allows managers to tie these costs to cost objects related to the chosen activities, greatly simplifying the sorting out of numerous processes in complex environments. However, EEC will find less use for this costing method, as its environment is streamlined and production processes are abbreviated.
Recommendation
The research above clearly indicates that life cycle costing is the EEC’s method of choice. As an electricity provider, EEC strongly emphasizes long-range planning to maximize its multi-year profits.
Therefore, if required, the EEC needs to afford the least expensive physical assets in terms of installation, operation, maintenance, and disposal. In this context, all decisions regarding increasing market penetration—arguably the best opportunity to contribute to long-term profitability—will be based on life cycle costing.