Absorption costing provides incentives for a company to hold excess inventory,which may increase the company's costs.

Question

Quizplus · Accepted Answer

Absorption costing includes fixed overhead costs in the product's cost of goods sold, which means that producing more units will result in lower fixed overhead costs per unit. This provides an incentive for companies to produce and hold excess inventory, even if it is not necessary, as it can lower the cost per unit. This can ultimately increase the company's costs, as the excess inventory can require additional storage and maintenance costs.

Absorption Costing Provides Incentives for a Company to Hold Excess