The following are the main limitations of absorption costing:
- Difficulty in comparison and control of cost. Absorption costing depends on the level of output; so different unit cost is attained for different levels of output. An increase in the volume of output normally results in reduced unit cost and a reduction in output results in an increased cost per unit due to the existence of fixed expenses. This makes comparison and control of cost difficult.
- Not helpful in the managerial decision. absorption costing is not very helpful in taking managerial decisions such as a selection of suitable product mix, whether to buy or manufacture, whether to accept the export order or not , choice of alternatives, the minimum price to be fixed during the depression, the number of units to be sold to earn the desired profit etc.
- Cost vitiated because of fixed cost included inventory valuation. In absorption costing, a portion of fixed cost is carried forward to the next period because the closing stock is valued at cost of production which in inclusive of fixed cost.
- Fixed cost inclusion in cost not justified. Many accountants argue that fixed manufacturing administration and selling and distribution overheads are period cost and do not produce future benefit and, therefore, should not be included in the cost of the product.
- Apportionment of fixed overhead by an arbitrary method. The validity of product costs under this technique depends on correct apportionment of overhead costs. But in practice, many overhead costs are apportioned by using arbitrary methods which ultimately make the product costs inaccurate and unreliable.
- Not helpful for the preparation of the flexible budget. In absorption costing, no distinction is made between the fixed and variable cost. it is not possible to prepare flexible without making this distinction.