Essay: Absorption Costing
Absorption costing is another form of traditional cost controlling strategy that is employed by businesses. Absorption costing systems tend to integrate and combine the various variables to present an integrate picture of the accounts. They are suitable for use in the financial statement of the business due to their aggregation characteristics, however they also pose some threats in the forms of issues that can arise leading to inaccuracy and inefficient reporting of accounts.
There are both benefits and as well disadvantages to using absorption costing for financial statements like the profit and loss calculations. The benefits pertain to the fact that all the funds are accounted for by the company. On the other hand the disadvantages pertain to the fact that it tends to combine costs that do not have a shared pattern or similar characteristics. This means that it tends to combine together different drivers. However it is possible to work around this problem by not implementing absorption costing in its entirety and to only implement it to the relevant and suitable cost drivers. (Vercio, 2008)
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