The mechanics of absorption costing can lead to year-to-year income changes

Question

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Absorption costing assigns fixed manufacturing overhead costs to units of products based on the number of units produced. If production and sales are not parallel, the inventory levels will change, which will affect the amount of fixed costs assigned to each unit, leading to a year-to-year income change. Option A may not always be true as changes in inventory levels can still impact income under absorption costing if there are changes in the level of fixed overhead costs. Option B may lead to a change in income, but not necessarily because of absorption costing. Option D may impact the cost of goods sold, but it may not necessarily lead to a change in income under absorption costing.

The Mechanics of Absorption Costing Can Lead to Year-To-Year Income