Absorption Costing Essay
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Absorption costing is an accounting method that adds up all the costs associated with the manufacture of a product. Absorption costing combines the overhead costs with the direct costs of manufacturing a product. The method is usually used when preparing external reports. Absorption costing can also be referred to as full costing or full absorption costing (Garrison, Noreen & Brewer, 2012). The types of costs associated with the manufacture of a product include cost of raw materials, wages, and overhead costs. Absorption costing bases its cost on all the costs that are incurred in the production of a good. This methodology is in contrast to the variable costing method where the fixed costs are not added to the cost of the product. Many people favor the absorption costing method because the fixed costs associated with the manufacture of a product create future benefits.
The argument supporting the use of absorption costing is the advantage the method brings when all the manufactured products are not sold within a given accounting period. The expenses of the remaining goods are not shown until all the units are sold (Johnston, 2015). Such procedures help in the improvement of profits reported in that particular period.
The disadvantage of absorption costing is that the method inflates the profit figures of the company (Johnston, 2015). The profit and loss statements do not show all the expenses incurred in the period if all the goods have not been sold. Such procedures are misleading in the determination of the profitability status of the company.
I support the absorption costing method because it enables the company to acquire future benefits associated with the fixed costs. The method enables the company to attract investors due to the high profitability levels. Absorption costing prevents the chances of undervaluing the profits made by the company.
Johnston, K., (2015). Advantages and Disadvantages of Using Absorption versus Variable Costing. Chron. Retrieved from: http://smallbusiness.chron.com/advantages-disadvantages-using-absorption-vs-variable-costing-34282.html
Garrison, R. H., Noreen, E. W. & Brewer, P. C., (2012). Managerial Accounting, (14th ed.). New York: McGraw Hill.
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