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-Fixed Manufacturing Costs are not divorced from production. They are very significant
especially in the modern automated industry. Thus, they should be included in the cost of
production and consequently in stock valuation.
- Where production is constant but sales fluctuate (which is what happens in real business life),
the net profit does not fluctuate as significantly as in marginal costing.
- Where stock building or piling is necessary part of operations, (for example, in timber
seasoning) inclusion of fixed costs in stock valuation is necessary and desirable for statements
to show a true and fair view. Otherwise, a series of fictitious losses will be shown in earlier
periods, only to be offset eventually by excessive profits when the goods are sold.
- Calculating the total costs of producing a good makes a firm to set a selling price that is NOT
below total cost. Calculating marginal cost and contribution may make a firm to set prices
that are below total cost while still producing some contribution.
- Matching concepts advocates for absorption costing: Costs and revenues must be matched in
the period when revenue arises, and not when costs are incurred. SSAP (Stocks and Work in
Progress) advocates for the matching concept and recommends that stock valuations must
include production overheads incurred in the normal course of business even if not time
related.
marto answered the question on February 26, 2019 at 09:41
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