Advantages Of The Cost Of Cost

1410 WordsApr 6, 20156 Pages
Advantages of Absorption Costing This Costing system takes both fixed and variable costs into consideration. This becomes very essential for taking the pricing decisions, as the manufacturer will get a clear idea of the profit margin to be made on each sale, as all costs would have been merged into the product cost. • Absorption cost treats all expenses as relevant. The absorption costing notes that, prices determined for products and services must cover the organization’s full expenditure system and, therefore, should be included in unit costs. • The bottom line profitability measures indicate the expenses beard in the production areas which are included in the calculation of expense per unit and is a reflection of the expense system of…show more content…
• Under this costing method, a part of fixed cost is carried forward to the next accounting period as the closing stock is valued at the total cost which includes fixed cost proportionally. • Under Absorption costing, unit costs at different levels of output are different hence, the process of cost control and cost comparison is challenging. • Under this approach, monitoring efficiency can lead companies to make faulty decisions in terms of production. • For a company making regular production and sales, with equal quantity of units each period, absorption costing will show the real cost of goods sold. If the production and sales are irregular, this approach will reflect that variable costs and fixed overheads change according to the sales. The fixed overhead costs won’t have any effect due to the level of production or sales but, variable costs will be affected by the level of production or sales. For a company having fluctuations in the level of sales and production, variable costs provide a better picture of costs to be incurred in order to run a business unit. • The disadvantage of absorption costing approach is the method of managing the fixed overhead costs. In this approach, all manufacturing costs are allocated to products. When companies do not make sales of the products they produce in a period, these costs remain in the balance sheet. This keeps the income high during periods
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