Benefits of absorption costing
Absorption costing refers to an accounting cost method wherein all the expenses incurred in the manufacture of a certain product is taken into consideration on a per-unit basis. The costing of all manufactured products will be based on the number of actual units manufactured rather than on a lump-sum or fixed amount. In the field of accounting in the manufacturing industry, recording costs by means of absorption costing will yield the following benefits:
1. Promotes fixed-rate overhead expenses
Absorption costing relies on the fact that the designated fixed overhead cost in the manufacturing process is divided on the number of actual units manufactured. With this type of accounting, companies will be able to truly plot their supposed operations cost at any given time in the manufacturing process. Businesses will be able to fully track what they are spending on through absorption accounting because the main expense factor to be used is a fixed overhead expense rate.
2. Less fluctuation in production records
Regardless if the manufactured unit or product is sold or disposed during a particular accounting period, the absorption costing will remain pretty much constant. This is basically because the costing is based on the actual manufactured unit rather on the average costs of operations on a per period basis.
3. Good profit record
Absorption costing also allows for better accounting records in terms of profits since the operations or overhead costs will only be reflected once the manufactured items are actually sold. All items that remain in inventory will continue to have their own value and will only be taken as profits when they get out of the warehouse for distribution.
The benefits associated with absorption costing make it the most common costing method used in terms of accounting and financial records. With absorption costing, the actual operations expense of manufacturing a product is quantified on a per unit basis and this helps businesses in terms of profit ratios and stock valuations.