Absorption costing helps managers to artificially inflate profits by encouraging the production of products that absorb the highest amount of fixed manufacturing costs.

Question

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Absorption costing allocates fixed manufacturing costs to each unit of product, resulting in a higher cost per unit. This means that products with higher production volumes will absorb more fixed costs and result in higher profits, even if they may not be the most profitable products overall. This can create an incentive for managers to produce more of these high-absorption products, leading to an artificial inflation of profits.

Absorption Costing Helps Managers to Artificially Inflate Profits by Encouraging