Question

Why is absorption costing the preferred method? (3 reasons)

Answer 1

Absorption costing is favored due to its alignment with financial reporting standards, comprehensive allocation of manufacturing costs to products, and the way it moderates income fluctuations.

Step-by-step explanation:

Absorption costing is the preferred method for several reasons, and here are three of them:

1. It aligns with financial reporting standards which require that inventory costs include all production costs, both fixed and variable.
2. Absorption costing ensures that all manufacturing costs are allocated to products, providing a more comprehensive view of product profitability.
3. It smoothens out net income fluctuations, as costs are fixed to the inventory until the goods are sold, which can be preferable for internal and external stakeholders.

These reasons make absorption costing a widely adopted practice in financial accounting and management as it provides a full picture of the cost associated with producing goods.