Under absorption costing, managers can increase operating income by producing more inventory at the end of the accounting period.

Question

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Under absorption costing, a portion of fixed manufacturing overhead is assigned to each unit of inventory produced. This means that as more inventory is produced, more fixed manufacturing overhead costs are absorbed and inventoried, which in turn reduces the amount of fixed overhead costs expensed in the current period. As a result, producing more inventory can increase operating income under absorption costing.

Under Absorption Costing, Managers Can Increase Operating Income by Producing