Limitations of Absorption Costing

Following are the limitations of absorption costing:

1. Comparison and control of cost is difficult because it depends on the level of output. An increase in the level of production reduces the unit cost and a decrease in the production level or output increases the unit cost. For different levels of output different unit costs are available.

2. Managerial decisions such as make or buy a product, choice of alternatives, fixation of price, number of units to be produced to earn desired profit etc., cannot be taken with the help of absorption costing because it considers the total cost and not the variable cost which is important for taking such decision.

3. In absorption costing, closing stock is valued at cost of production (fixed cost and variable cost), which means a portion of fixed cost is carried forward to the next period.

4. It lacks accuracy in determining the selling price of a product or service as it considers the total cost for its calculation.

5. It is considered to be an unsound practice, in the sense that all the costs incurred in the year are not charged to revenue.

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