Question

why do proponents of absorption costing argue that absorption costing is preferable as the basis for pricing decisions?

Answer 1

The proponents of absorption costing argue that absorption costing is preferable as basis for pricing decesion because under absorption fixed manufacturing cost also form a part of product cost. The proponents of absorption costing argue that in production they also incurred  the fixed cost like variable cost so it is part of product cost. If we exclude the fixed manufacturing cost from production process It will lead to underestimation of product cost. Under estimated product cost will lead to lower value of inventory. It means value of inventory under absorption costing will be more as compared to inventory under variable costing. Because under variable Costing fixed manufacturing cost is not part of product cost.

So product cost is under estimated in variable cost which will result lower price and that price will not cover the fixed manufacturing cost. But under absorption costing price will cover fixed cost as well as variable cost. So proponents of absorption costing preferred absorption costing for price decision because it covers fixed manufacturing cost and variable cost. Price under absorption costing will give more profit as compared to variable costing..