Management may be tempted to overproduce
A)when using variable costing, in order to increase net income.
B)when using variable costing, in order to decrease net income.
C)when using absorption costing, in order to increase net income.
D)when using absorption costing, in order to decrease net income.

Question

Quizplus · Accepted Answer

When using absorption costing, fixed manufacturing overhead costs are included in the cost of the product. Therefore, producing more units will spread these fixed costs over a greater number of units, resulting in a lower cost per unit and higher net income. This is known as the "absorption" of fixed overhead costs. However, overproduction can lead to inventory build-up and holding costs, so management must also consider the impact on cash flow and the potential for obsolescence or spoilage.

Management May Be Tempted to Overproduce