Advantages Of Absorption Costing System
Following are the main advantages of absorption costing system:
1. Absorption costing recognizes fixed costs in product cost. As it is suitable for determining price of the product. The pricing based on absorption costing ensures that all costs are covered.
2. Absorption costing will show correct profit calculation than variable costing in a situation where production is done to have sales in future ( eg. seasonal production and seasonal sales).
3. Absorption costing conforms with accrual and matching accounting concepts which requires matching costs with revenue for a particular accounting period.
4. Absorption costing has been recognized for the purpose of preparing external reports and for stock valuation purposes.
5. Absorption costing avoids the separating of costs into fixed and variable elements.
6. The allocation and apportionment of fixed factory overheads to cost centers makes manager more aware and responsible for the cost and services provided to others.
Disadvantages Of Absorption Costing System
1. Absorption costing is not useful for decision making. It consider fixed manufacturing overhead as product cost which increase the cost of output. As a result, it does not help in accepting specially offered price for the product. Various types of managerial problems relating to decision making can be solved only with the help of variable costing system.
2. Absorption costing is not helpful in control of cost and planning and control functions. It is not useful in fixing the responsibility for incurrence of costs. It is not practical to hold a manager accountable for costs over which he/she has not control.
3. Some current product costs can be remove from the income statement by producing for inventory. As such, managers who are evaluated on the basis of operating income can temporarily improve profitability by increasing production.