BENEFITS AND LIMITATIONS OF ABSORPTION COSTING

 Benefits of using absorption costing

  • Conforms with the accrual concept of matching costs with revenues

  • Stock valuation complies with financial reporting standard IAS 2

BENEFITS AND LIMITATIONS OF ABSORPTION COSTING

  • By analyzing over/(under) absorption of overheads any inefficient utilization of resources may be revealed

  • By apportioning and allocating fixed production overheads to cost centers the company can make managers more aware of costs/services provided by each cost centre and this may facilitate cost reduction

  • If the company uses absorption costing it will base its pricing policy on full product cost and this ensures all costs are covered (provided that budgeted activity is achieved to avoid under absorption)

  • fixed costs are becoming more significant in business operations. Absorption costing emphasizes the importance of such costs by including them in the cost of production



limitations of using absorption costing

  • Absorption costing is more complex in its application and the company will have to recognize this in preparing its management accounts

  • Absorption costing is not as useful as variable costing or marginal costing for short-term decision-making purposes due to the inclusion of fixed costs

  • As the absorption rate of fixed production overhead is based on anticipated production and the overheads are estimated there is a greater likelihood of under or over absorption

  • By using absorption costing the company may have difficulty dividing fixed overhead expenses between production and service departments. Sometimes this may result in arbitrary and inaccurate allocations

RELATED POSTS

Comments

Post a Comment

Popular posts from this blog

10 TIPS TO PRESERVE THE ENVIRONMENT IN CANADA

Image
  What does it mean to be an environmentally friendly person? For many, this means recycling your trash, turning off the lights when you leave the room, or using an energy-efficient car. These are all great ways to make your mark on the environment, but at the end of the day, there’s only so much one person can do to mitigate pollution and destruction of the natural world around them. Fortunately, Canada has made strides in recent years to preserve its environment and protect its plant and animal species from destruction and extinction. Here are ten ways you can do your part to help preserve the environment in Canada. Reduce Your Carbon Footprint For as long as humans have been around, we’ve polluted and degraded our natural environment. Now is a great time to change that dynamic. Here are 10 ways you can reduce your carbon footprint and help clean up Mother Nature’s air.  Compost – Recycle – Reuse If you’re making a concerted effort to preserve the environment, it’s worth che...
Read more

5 TYPES OF HUMAN ACTIVITIES

Image
  Human activities are functions, tasks, or works done by human beings over time for achieving certain purposes. In total there are five types of human activities namely primary human activities, secondary human activities, tertiary human activities, quaternary human activities, and quinary human activities. These types of human activities together with their examples are going to be explained one by one below. The following are five types of human activities Primary human activities are human activities that involve extracting raw materials directly from the earth. Examples of primary activities are farming, fishing, lumbering, and livestock keeping. Secondary human activities these are human activities that involve the processing of raw materials into useful products. These activities involve converting raw materials into finished products and are mainly performed in urban areas. they accelerate the development of primary activities because they provide the market for products fr...
Read more

10 EFFECTS OF THE KABAKA CRISIS OF 1953

Image
In 1952 Sir Andrew Cohen was appointed as the new Governor of Uganda. Misunderstandings soon cropped up between him and Kabaka Muteesa II of Buganda and this made Cohen to depose the Kabaka. On 30th November 1953, he deported the Kabaka to London where he lived in exile till 1955. The political confusion surrounding the deportation of the kabaka is referred to as the “Kabaka crisis”. 15 EFFECTS OF THE KABAKA CRISIS OF 1953 The crisis seriously undermined and terminated the Buganda Agreement of 1900. By disrespecting each, both the Kabaka and Governor Cohen broke the Agreement and rendered it null and void. Kabaka Muteesa II was deportated to London where he stayed for two years till 1955 when he returned. The crisis led to strained relations between the British and the former Baganda collaborators because of the deportation of their kabaka. The kabaka crisis influenced the British to speed up the independence of Tanganyika more so because even in Kenya the Mau-Mau rebellion had broken ...
Read more