Advantages and Disadvantages of Absorption Costing System

Learning Objectives:

1. What are the advantages and disadvantages of using absorption or full costing method?

Advantages of Absorption Costing:

• It recognizes the importance of fixed costs in production;

• This method is accepted by Inland Revenue as stock is not undervalued;

• This method is always used to prepare financial accounts;

• When production remains constant but sales fluctuate absorption costing will show less fluctuation in net profit and

• Unlike marginal costing where fixed costs are agreed to change into variable cost, it is cost into the stock value hence distorting stock valuation.

Disadvantages of Absorption Costing:

• As absorption costing emphasized on total cost namely both variable and fixed, it is not so useful for management to use to make decision, planning and control;

• as the manager’s emphasis is on total cost, the cost volume profit relationship is ignored. The manager needs to use his intuition to make the decision.

You may also be interested in other articles from “variable costing system” chapter

1. Variable Costing Vs Absorption Costing
2. Income Comparison of Variable and Absorption Costing
3. Advantages and Disadvantages of Absorption Costing
4. Limitations of variable costing – GAAP and External Reports
5. Advantages of Variable Costing
6. Variable Costing and Theory of Constraints
7. Impact of Just In Time (JIT) Inventory Methods
8. Variable | Direct Costing and Absorption Costing Discussion Questions and Answers

Other Related Accounting Articles:

• Income Comparison of Variable and Absorption Costing
• Absorption Costing Definition
• Importance of Contribution Margin – Advantages of Cost Volume Profit (CVP) Analysis
• Limitations of Cost-Volume-Profit (CVP) Analysis
• Absorption Costing Approach to Pricing
• Assumptions of Cost-Volume-Profit (CVP) Analysis
• Definition and Explanation of Activity Based Costing System
• Effect of Change in Variable Cost and Sales Volume on Contribution Margin and Profitability
• Advantages and Disadvantages of Standard Costing and Variance Analysis
• Cost Volume Profit Relationship – (CVP Analysis)