Advantages and disadvantages of absorption cost method

The advantage is that the unit product cost is directly affected by the output, and the higher the output, the lower the unit product cost. At the same time, the inverse relationship between unit product and output can stimulate enterprises to improve the enthusiasm of product production.

The first disadvantage is that it is not conducive to cost management. The allocation of fixed manufacturing costs increases the workload of cost calculation and affects the timeliness and accuracy of cost calculation. The division of variable cost and fixed cost in product cost makes the cost control work complicated.

The second disadvantage is that it is not conducive to the short-term decision-making of enterprises. According to the calculation of absorption cost method, the profit can't keep the corresponding proportion with the increase or decrease of sales volume, so it is not easy to be understood by people, which is not conducive to short-term decision-making, control and analysis, or even one-sided pursuit of output.

Extended data:

The difference between completion cost method and variable cost method;

1, different theoretical basis:

The theoretical basis of variable cost method: fixed manufacturing costs are related to a specific accounting period, and are directly proportional to the length of the continuous operation period of enterprise production and operation activities, and disappear with the passage of time.

The theoretical basis of absorption cost method is that the fixed manufacturing cost occurs in the production field and is directly related to product production, which is no different from direct materials, direct labor and variable manufacturing cost, and should be compensated from product sales income as part of product cost.

2, the product cost composition content is different:

The variable cost method takes the fixed part of manufacturing expenses as the current expenses and deducts them in full together with the sales and management expenses, regardless of whether there is any inventory balance at the end of the period. The product cost only includes direct labor, direct materials and variable manufacturing expenses. The product cost in the absorption cost method includes direct materials, labor and all manufacturing expenses of producing products, and the cost is carried forward with the circulation of products.

3, the application premise is different:

Based on the analysis of cost behavior, variable cost method divides product cost into variable cost and fixed cost according to its linear relationship with output change, and makes a rough estimation. Among them, variable costs include direct materials, direct labor, variable manufacturing expenses and variable sales management expenses; Fixed costs include fixed manufacturing expenses and fixed sales and management expenses.

In the absorption cost method, costs are divided into production costs and non-production costs according to their uses. Among them, production costs include direct materials, direct labor and manufacturing costs, and non-production costs include period expenses such as sales and management expenses.

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