According to a CIMA research report from 2006, many manufacturing companies continue to use traditional management accounting techniques such as absorption costing. The research explored 41 UK manufacturing companies and revealed that virtually all traditional management accounting techniques – such as absorption costing, standard costing and variable costing – were in use in all firms. According to the research, approximately 30 per cent of the firms interviewed used traditional absorption costing methods for product costing. Marginal costing was used by the vast majority however, due to its simplicity of application. A more recent 2009 survey of management accounting practices conducted by CIMA revealed that approximately 45 per cent of more than 400 respondent firms used absorption costing techniques for product costing and pricing.

The 2009 survey also revealed that absorption costing was used to a greater degree in larger companies, with more than 50 per cent of firms employing 250 or more people using the technique. These two pieces of research portray absorption costing as still widely used, despite its limitations.

Questions 

1 Why do you think absorption costing is more likely to be used by larger business?

2 What difficulties might be faced by smaller firms who may want to utilize absorption costing?