Which of the following is true of absorption costing?
A) It enables a manager to decrease margins and operating income by producing more beginning inventory.
B) It enables a manager to increase margins and operating income by producing more beginning inventory.
C) It enables a manager to decrease margins and operating income by producing more ending inventory.
D) It enables a manager to increase margins and operating income by producing more ending inventory.

Question

Quizplus · Accepted Answer

Absorption costing takes into account all costs including both fixed and variable costs in the costing of a product. As a result, producing more products and building up more inventory would lead to a higher allocation of fixed costs and hence lower per-unit cost. This could result in higher margins and operating income, especially if more products are sold than those produced, leading to higher ending inventory. Hence, option D is correct.

Which of the Following Is True of Absorption Costing