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Hi,
I just wanted to know if ABC systems can be used for external reporting? Or can only traditional absorption costing systems be used?
Also, other than traditional absorption costing systems being less costly, what are some of the advantages of traditional absorption costing systems?
Thank you
Hi, thanks for your question.
ABC cant be used for external reporting because it doesnt comply with GAAP so unfortunately it is useful for internal product costing only.The traditional absorption costing system has the advantages of being easier to compute compared with ABC and the traditional absorption system is acceptable for GAAP so no additional adjustments are needed for reporting externally.
In comparison to marginal costing – the absorption system ensures that all manufacturing costs – direct and indirect are charged to the product units – this should mean the selling price chosen should always be at a level which covers all costs.
Absorption costing is also seen to give a fairer view of profitability when compared to marginal costing for situations when manufactured units are not all sold in the period.
This is especially important for companies who will build inventory levels up in advance of peak selling periods (seasonal sales).Kind Regards
Cath
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