Absorption cost is a worldwide accepted cost accounting method. It has associated advantages which are as follows:
Advantages
It considers both variable and fixed overheads and a result, products are priced considering the total cost. This ensures products are sold at a profit,
It is useful for financial accounting purpose as IAS 2 for Inventories requires that the cost of the product must include some portion of the fixed overheads.
If the product takes more than one accounting period to complete, fixed cost is only deducted from profit when the sale is done. This completely aligns with the matching principle of accounting.
