Individuals, corporations, and governments make important decisions every day. To make the best decisions, they need to accurately weigh the relative benefits and costs of various alternatives. For example, the decision to purchase a home involves a comparison of the positive and negative aspects of each potential site in order to choose the one that meets a household's needs at an affordable price.
Businesses go through a similar process when they decide on new production processes or a location for a factory. Sometimes, though, choices affect others in ways that create conflict. The smokestack emissions from a new factory, for instance, might soil laundry drying on the clotheslines of neighboring households. If the factory is required to replace the soiled clothes or purchase dryers for the affected households, then the business might choose to relocate elsewhere. Alternatively, if the households know that there will be a factory nearby with damaging emissions, they might pick a different place to live. The identification of the responsible party in such cases is typically considered a legal question, but the example shows how difficult it can be to make satisfying decisions in the absence of information on the full range of costs and benefits of the relevant choices.
In general, the term "full cost accounting" refers to the process of collecting and presenting information to decisionmakers on the trade-offs inherent in each proposed alternative. The process can be especially important for government agencies that represent a variety of interests when deciding how to allocate public funds and/or natural resources.
The fundamental economic concept in FCA is opportunity cost. This definition of cost refers to the value of opportunities that are given up when a choice is made to use a limited resource for a specific purpose. Opportunity costs are typically measured in terms of direct or indirect changes in market values, but can also be measured as changes in non-market values (i.e., not reflected in market transactions). It can also be described according to legal responsibilities assigned for paying the costs. Costs for which each resource user is legally responsible for paying are private costs. The material used in filling the wetland is a private cost because payment of a fair market price is required to use the material. Opportunity costs that are not the private responsibility of the resource user are deemed external costs or (negative) externalities.
Source: FCE Electronic Data Information Source