Absorption costing makes it difficult for financial statement users to interpret year-to-year changes in reported income when inventory levels change between one year and the next.

Question

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Absorption costing includes fixed manufacturing overhead as part of the cost of inventory, so changes in inventory levels can have a significant impact on reported income. This makes it more challenging for financial statement users to compare income from one year to the next when inventory levels fluctuate.

Absorption Costing Makes It Difficult for Financial Statement Users to Interpret