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Hi,
I don’t understand why absorption costing is not useful for decision making unlike marginal costing.
Is it correct if I said marginal costing is useful for decision making because it take into account of all the variable costs incurred in making a product, so a company can know if a product is making a profit or loss and thus can increase production to enjoy greater benefits of making the product?
Can’t absorption costing do the same? We can calculate the cost of making a product and see whether if it is making profit or loss and thus increase production to enjoy greater benefits? Is it because of the fixed costs? How does it affect decision making?
Thank you in advance.
It is because of the fixed costs. As the sales change, the revenue and the variable costs both change (and so the contribution changes) but the total fixed overheads will stay the same.
So if they are having to make decisions as to (for example) how many to produce, or what the effect on profit will be of different sales levels it is easier just to look at the effect on the total contribution, knowing that the fixed costs will not change.
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