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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




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