The Advantages And Disadvantages Of Absorption Costing

Question 3

In absorption costing all costs that are involved in manufacturing are treated as product, doesn’t matter of whether it is variable or fixed. Direct labor, direct materials, variable manufacturing overhead and variable selling and administrative expenses are variable costs. Where the cost for a unit product under the absorption costing method consists of variable cost and a part of fixed manufacturing overhead. Because of absorption costing include all manufacturing costs in product costs, it is usually denominated to as the full cost method.

However under the marginal costing, just the manufacturing costs that changes with yield will be dealt with as product cost. This would normally comprise of direct materials, direct labor, and

Absorption costing takes into account all of the costs of production, not just the direct costs, as variable costing does. Absorption costing includes a company's fixed costs of operation, such as salaries, facility rental and utility bills. Having a more complete picture of cost per unit for a product line can be helpful to company management in evaluating profitability and determining prices for products.

Absorption costing also provides a company with a more accurate picture of profitability than variable costing does if all of its products aren't sold during the same accounting period when they are manufactured. This can be especially important for a company that ramps up production well in advance of an anticipated seasonal increase in

Besides, in managerial decision-making; the contribution is used as a tool. It is more trustworthy in decision making. In stock valuation of some proportion of current years fixed overhead, the illogical carry forward can be prevented. Marginal costing also shows more obviously the effect on profit of variations in the capacity of sales. It expenses off large amount of balances left in overhead control accounts which represents the trouble of determining precise overhead recovery rate. Furthermore, Practical cost control is prominently enabled. Determinations can be concerted on keeping a consistent marginal cost by preventing arbitrary allocation of fixed overhead. It is beneficial to several levels of management. Next, the dominant relationship between cost, selling price and volume are well explained in strong