Absorption costing is a technique of cost that takes into account all of the expenses associated with production.
There are many benefits of absorption costing. The following are the main advantages of absorption costing:
- It appropriately recognises the need of considering fixed manufacturing costs in product cost estimation and defining an appropriate price structure. In reality, all costs (fixed and variable) associated with production should be charged to the unit of production produced.
Prices established on the basis of absorption costing guarantee that all costs are covered completely. When full cost is used as a foundation for pricing, the market is well-regulated.
- 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 calculate the gross profit and net profit separately in the income statement.
- It assists in making managers more accountable for the costs and services supplied to their centers/departments as a result of the proper allocation and apportionment of fixed manufacturing resources.