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 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 ...