A disadvantage of absorption costing is
A) that it is not a useful format for decision making.
B) that it might encourage inventory build up.
C) both a and b.
D) none of the above.

Question

Quizplus · Accepted Answer

Absorption costing tends to encourage inventory buildup because it includes fixed manufacturing overhead costs in the cost of inventory. This can lead to higher reported profits in periods where production exceeds sales, and lower profits in periods where sales exceed production. Additionally, because absorption costing includes all manufacturing costs in the cost of inventory, it may not provide as useful information for decision making as variable costing, which separates fixed and variable costs.

A Disadvantage of Absorption Costing Is