Absorption costing prevents managers from increasing production to levels above customer demand, as a means of inflating operating income.

Question

Quizplus · Accepted Answer

Absorption costing includes fixed overhead costs in the cost of producing a product, regardless of whether or not all units are sold. This can lead to higher reported operating income when production is increased, even if there is not enough customer demand to support it. Therefore, absorption costing can actually incentivize managers to increase production beyond customer demand as a means of increasing operating income.

Absorption Costing Prevents Managers from Increasing Production to Levels Above