Under absorption costing, managers may have an incentive to manipulate earnings through production levels.

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing overhead costs are allocated to products. Therefore, by increasing production, managers can spread these fixed costs over more units, reducing the cost per unit and increasing inventory values, which can temporarily boost reported earnings even without an increase in sales.

Under Absorption Costing, Managers May Have an Incentive to Manipulate