Reasons and justification for using Absorption Costing (Advantages)

- All production overheads are incurred in the production of the organization’s output and so each unit of the product receives some benefit from the costs. Each unit of output should therefore be charged with some of the overhead costs.
- The valuation of inventories is consistent with that of financial accounting principles and affects the profitability during a period because of the way in which the cost of sales is calculated. Fixed costs are inevitably incurred within the production and should be included in inventory valuation. Absorption costing follows the matching concept by carrying forward a proportion of the production costs in the inventory valuation to be matched against the sales value when the items are sold.
- Many companies attempt to set selling prices by calculating the full cost of production or sales of each product, and then adding a margin of profit. ‘Full cost plus pricing’ can be particularly useful for companies which do jobbing or contract work.
- If a company sells more than one product, it will be difficult to judge how profitable each individual product is unless overhead costs are shared on a fair basis and charged to the cost of sales of each product.