Absorption costing is a technique of costing that takes into account all of the expenses associated with production.
The following are the main advantages of absorption costing:
- It suitable recognises the importance of including fixed manufacturing in product cost determination and framing a suitable pricing, In fact, all cost ( fixed and variable) related to production should be charged to unit manufactured. Prices based on an absorption costing ensures that all cost are covered. Prices are well regulated where full cost is the basis.
- It will show correct profit calculation in the case where production is done to have sales in future ( e.g., seasonal sales) as compared to variable costing.
- It helps to conform with accrual and matching concepts which required matching cost with revenue for a particular
- It has been recognised by various bodies as FASB (USA.) ASC (UK), ASB ( INDIA) for the purpose of preparing external reports and for valuations of inventory.
- It avoids and the separation of cost into fixed and variable elements which cannot be done easily and accurately.
- It discloses inefficient of efficient utilisation of production resources by indicating under absorption or over absorption of factory overheads.
- It helps to make the manager more responsible for the cost and services provided to their centres/departments due to correct allocation and apportionment of fixed factory
- It helps to calculate the gross profit and net profit separately in the income statement.