Syllabus C. Cost Accounting Techniques C2. Absorption and Marginal Costing

C2e. Advantages and disadvantages 5 / 5

Syllabus C2e)

Describe the advantages and disadvantages of absorption and marginal costing.

Absorption & Marginal Costing

Advantages of absorption costing Advantages of marginal costing
Complies with ias 2 “inventories” Contribution per unit is constant over different sales volumes
Better cost control due to analysing under-/over- absorption No over- or under- absorption
Recognises that selling price must cover all costs Highlights contribution so appropriate for decision-making
Profit depends on sales and efficiency not on production levels
Simple to operate
Disadvantages of absorption costing Disadvantages of marginal costing
Profits can be manipulated by changing production levels Contribution may not cover fixed costs
It is based on the assumption that overheads are volume-related Does not comply with ias 2
Fixed production overheads are not shared between units of production but written off in full