- July 25, 2021 at 9:25 am #629357jermy01Participant
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- Replies: 29
Which of the following are practical reasons for using absorption costing?
(i) To establish the profitability of different products
(ii) To aid decision making by focusing on product contribution
(iii) To encourage management to produce more goods in order to absorb all allocated overheads
(iv) To value closing inventory in accordance with accounting principles
A (i) and (iii)
B (ii) and (iv)
C (i) and (iv)
D (ii) and (iii)
my question is,
**To encourage management to produce more goods in order to absorb all allocated overheads, it could be a reason for absorption costing so that we can charge overhead cost into the cost unit, right?
or is it related to marginal cost?July 25, 2021 at 1:50 pm #629387John MoffatKeymaster
- Topics: 56
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Producing more goods does reduce the absorption rate and therefore the absorption cost per unit.
However the purpose of both absorption and marginal costing is not to encourage them to produce more units. There is no point in producing more units if you cannot sell them 🙂
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