Disadvantage of Absorption Costing

Disadvantage of Absorption Costing

Disadvantages of absorption costing may be explained in relation to limited use in decision making, profit manipulation, and selection of appropriate absorption rate.

1.    Limited use in Decision making

First disadvantage of absorption costing is its limited role in the decision making process. Absorption costing fails to establish a direct link between sales and profitability. Therefore management prefers to use marginal costing for decision making.

2.    Profit Manipulation

Second disadvantage of absorption costing is its ability to manipulate the profit. In absorption costing profit can be manipulated by changing the stock valuation i.e. by under or over stock. Due to overhead cost in stock valuation, margin of manipulation is high as compared to marginal costing.

3.    Appropriate Absorption rate

Third disadvantage of absorption costing is finding of appropriate absorption rate. In many cased there is no link between absorption rate used and overhead. It means that absorption rate is used are to general in nature. For example factor rent is absorbed by using machine hour make no sense.