Advantages Of Absorption Costing

Report – Management accounting 2

Introduction

This report will cover an in depth analysis of the Standard Costing system (Absorption Costing), Activity Based Costing (ABC) and it will also cover Activity Based Management (ABM). This report will help to clarify any unreliable sources which have indicated that Absorption Costing is the way forward. This report will investigate the shortcomings of absorption costing, it will also cover other areas such as the benefits and shortcomings of Activity Based Costing (ABC) and it will also touch the advantages and disadvantages of using Activity Based Management (ABM). By the end of this report the management team of the computer company will be comfortable and will have the knowledge to use other

This effectively leads to managers and investors thinking that the company has more money than it is said to Wihave. Which in turn means they could over spend on raw materials and other essentials to start the next production, and by spending this money it will create debt which the company will have to pay back, which could lead to loans etc. for the company, which again starts a cycle that could be avoidable with other systems. Absorption Costing also falls short to provide

Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilise cost drivers to attach activity costs to outputs.” Compared to the traditional costing system, Activity Based Cost (ABC) is a lot more sophisticated and it is the most commonly used system within business although it is a lot more time consuming. For example, if a company has two products that they were selling and one was more demanding in ways that it needed a specific kind of engineering and it needed a unique way of testing. Then the other product was just manufactured through a machine the overhead activity would appear much great when the traditional system is used – absorption costing. Whereas with ABC each individual step of the process is priced which allows the company to see how much is owed in all aspects of manufacturing and selling. The use of ABC has increased rapidly over the past decades due to the fact that there is a more advanced technology in the world today and for competitors to compete they have to have top of the line products, and this is why activity based costing is being used as it ensures all aspects of costs are being considered within the price. With ABC it allows the accountant within the business to produce a more accurate representation of the product and by