Full absorption: The good, the bad, and the ugly

✍ Scribed by Alan Vercio

• Publisher: John Wiley and Sons
• Year: 2008
• Tongue: English
• Weight: 67 KB
• Volume: 19
• Category: Article
• ISSN: 1044-8136
• DOI: 10.1002/jcaf.20385

✦ Synopsis

Abstract

There are good, bad, and ugly uses associated with full absorption costing. Good characteristics include ensuring that all dollars are accounted for. Bad characteristics include combining costs that do not have similar cost driver patterns. Ugly characteristics include decisions made with fully absorbed cost data that combines different drivers. Financial accounting inventory valuation forces us to combine unlike drivers of cost. But there is a relatively easy way to manage around this for internal reporting. An unfortunate outcome of letting the bad and the ugly creep into the full‐absorption costing process is that the value of full absorption has been undermined, and consultants often recommend not using full absorption for decision making (a case of throwing the baby out with the bathwater). This article provides insight and recommendations for getting the full value from full‐absorption costing. © 2008 Wiley Periodicals, Inc.