Under absorption costing,increases or decreases in income from operations due to changes in inventory levels could be misinterpreted to be the result of operating efficiencies or inefficiencies.

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Quizplus · Accepted Answer

This is true because under absorption costing, fixed manufacturing overhead costs are included in the cost of goods sold and inventory. Therefore, if inventory levels increase or decrease, it will directly affect the amount of fixed manufacturing overhead costs that are expensed in a given period. This can lead to fluctuations in income from operations that may not be related to actual changes in operating efficiency or inefficiency.

Under Absorption Costing,increases or Decreases in Income from Operations Due