Which of the following is NOT an advantage of absorption costing when compared with marginal costing?

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BlackTom AI · Accepted Answer

Question restatement: Which of the following is NOT an advantage of absorption costing when compared with marginal costing?

Option 1: It does not require costs to be analysed into fixed and variable elements
- This is not true of absorption costing. Absorption costing requires tracing and allocating both fixed and variable costs to products, not treating them as a single lump sum. In other words, the costs are indeed analysed into fixed and variable elements for absorption costing purposes, so this statement is false as a description of absorption costing’s nature. Therefore, it is not an advantage.

Option 2: It is consistent with accruals principle
- Absorption costing aligns with accrual accounting because product costs include fixed and variable overhead and are recorded in inventory until sold, with cost of goods sold recognized when revenue is earned. This consistency with accruals principle is an actual advantage of absorption costing.

Option 3: It provides information more useful for decision making
- This is the commonly cited weakness of absorption costing for internal decision making. Since it allocates a portion of fixed overhead to inventory, reported profits can be influenced by production levels rather than by actual sales activity. Marginal costing typically provides clearer cost information for short-term decisions, making absorption costing less useful for those decisions. Hence, this statement is not an advantage.

Option 4: The importance of fixed costs is highlighted
- By including fixed overhead in product costs, absorption costing highlights fixed costs within inventory valuation and cost of goods sold. This is considered an advantage when the goal is to reflect full production costs on the financial statements.

Option 5: Profit is consistent with external reporting
- Absorption costing is required or permitted under many external reporting frameworks (e.g., GAAP/IFRS) for inventory valuation and profit reporting. This alignment with external reporting requirements is an advantage.

In summary, the statements that describe absorption costing as providing information useful for internal decision making (Option 3) and, to an extent, not requiring fixed/variable analysis (Option 1) contradict the typical advantages attributed to absorption costing. Given the listed options, the one that is explicitly not an advantage in the common comparison with marginal costing is Option 3, which states that it provides information more useful for decision making. The other options describe features that are considered advantages or accurate characteristics of absorption costing.

LC Decision Making & Control 32181 Week 3 Quiz: Absorption Costing

Which of the following is NOT an advantage of absorption costing when compared with marginal costing?

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