7.4 Arguments for the use of absorption costing

Arguments for the use of Absorption Costing:

1. Conforms to GAAP: Absorption costing conforms to generally accepted accounting principles (GAAP) and is used for external reporting and tax purposes. It is a more accurate method of calculating profit and can provide a more realistic picture of a company’s financial performance.
2. Useful for long-term planning: Absorption costing is useful for long-term planning, such as capacity planning and capital budgeting. It takes into account all costs, including fixed costs, which are more likely to change in the long term.

• More accurate costing: Absorption costing is a more accurate method of costing, as it allocates all costs, both variable and fixed, to the cost of goods sold. This can provide a more accurate picture of the true cost of production and can help managers to make more informed decisions.

1. Useful for inventory valuation: Absorption costing is useful for inventory valuation, as it includes all costs, including fixed costs, in the cost of goods sold. This can provide a more accurate picture of the true value of inventory and can help managers to make more informed decisions.
2. Useful for setting prices: Absorption costing can be used to set prices that cover all costs, including fixed costs. This can help managers to set prices that are more accurate and that contribute to the profitability of the company.