Since the percentage-of-sales method assumes that all the form's costs and expenses are variable, it tends to understate profits when sales are increasing and overstate profits when sales are decreasing.

Question

Quizplus · Accepted Answer

The percentage-of-sales method assumes that all costs and expenses are variable, which means that they will fluctuate in proportion to changes in sales. However, not all costs and expenses are truly variable, and some may remain fixed or semi-fixed regardless of sales levels. As a result, when sales are increasing, the percentage-of-sales method may underestimate the true amount of fixed and semi-fixed expenses, leading to an understatement of profits. Conversely, when sales are decreasing, the method may overestimate the amount of fixed and semi-fixed expenses, leading to an overstatement of profits.

Since the Percentage-Of-Sales Method Assumes That All the Form's Costs