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Home » Variable Costing System » Advantages and Disadvantages of Absorption Costing
 
 

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.

Relevant Articles:

» Variable Costing Versus Absorption Costing System
» Income Comparison of Variable and Absorption Costing
» Advantages, Disadvantages and Limitations of Variable Costing System
» Advantages and Disadvantages of Absorption Costing
» Variable Costing and Theory of Constraints
» Impact of Just In Time (JIT) Inventory Methods on Variable and Absorption Costing System

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
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  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
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  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
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  Activity Based Costing System
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  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 

 

 

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