Advantages and Disadvantages of Absorption Costing System:
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.
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.
