Merits of Absorption Costing

The following are the merits of absorption costing:

1. Absorption costing ensures that all costs are covered. This is because under absorption costing, all costs should be charged to units manufactured.

2. Absorption costing helps to confirm accrual and matching concepts which require matching costs with revenue for a particular period.

3. It makes calculation of gross profit and net profit separately in income statement possible.

4. Absorption costing discloses the efficient or inefficient utilization of production resources by indicating underabsorption or overabsorption of factory overheads.

5. This method has been recognized by various bodies like, FASB (US), ASC (UK), ASB (India) for the purpose of preparing external reports and valuation of inventory.

   'Table 1: Ascertainment of Profit Under Absorption Costing

   Particulars	Amount (Rs.)	Amount (Rs.)
   Sales		xxxx
   Less: Cost of Goods Manufactured:
   -       Direct Material	xxx
   -       Direct Labor	xxx
   Factory Overheads:
   -       Variable	xxx
   -       Fixed (at actual production basis)	xxx
   	xxx
   Add: Value of Opening Stock	xxx
   	xxx
   Less:  Value of Closing Stock	xxx
   	xxx
   Add: Underabsorption of fixed overhead (or)
   Less: Overabsorption of fixed overhead	xxx	xxxx
   Gross Profit		xxxx
   Less: Administration, Selling&Distribution  Expenses:
   Fixed	xxx
   Variable	xxx	xxxx
   Net Income or Profit		xxxx

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