Question

What are the main differences between Absorption vs Job-Order Costing in regards to decision making?

There are millions of companies around the globe from retail stores to fast food, from tech firms to privately owned businesses. Out of the many questions these companies have to answer day after day, one question comes to mind how do I decide on whether my company is a job-order costing or an absorption costing? I fill that each company needs to define what they intend to be offering to the public if your a fast-food chain you probably would look into having a job-order costing approach since the products they produce are so diverse. Managers have a multitude of things to accomplish but identifying what type of product are we producing and is it diverse enough to take a job-order approach or should I take the absorption costing approach and appoint the costs to individuals products.

Answer 1

Decision on which approach to follow whether job order or absorption costing is that simple.

As the name itself tells job order, if the company is completely on jobs that is each job is different and requires different types of inputs then job order costing would be definitely better.

On the other hand absorption costing, if the product line is identical and not different with each other then absorption costing would be better.

This is because if at all, the output is always the same, then going for different cost approach for each product is not at a genuine solution. LOL.