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Absorption and marginal costing
3.2 Advantages and disadvantages of absorption costing
When compared to other costing systems the absorption costing system has the
following advantages and disadvantages.
Advantages
Fixed production costs can be a significant part of total costs.
This method is required for financial reporting purposes.
Under/over-absorption can identify inefficient utilisation.
There is an argument that in the longer term, all costs are variable.
Disadvantages
It requires arbitrary apportionment and allocation of overheads.
The absorption basis may not actually drive the overhead cost.
It is more complex than marginal costing.
It encourages over-production.
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