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Full absorption: The good, the bad, and the ugly
Author(s) -
Vercio Alan
Publication year - 2008
Publication title -
journal of corporate accounting and finance
Language(s) - English
Resource type - Journals
eISSN - 1097-0053
pISSN - 1044-8136
DOI - 10.1002/jcaf.20385
Subject(s) - activity based costing , total absorption costing , valuation (finance) , process costing , business , absorption (acoustics) , operations management , actuarial science , operations research , risk analysis (engineering) , accounting , economics , engineering , materials science , composite material
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.