When absorption costing is used, management may be tempted to overproduce in a given period in order to increase net income.

Question

Quizplus · Accepted Answer

Since absorption costing allocates fixed manufacturing overhead costs to each unit produced, producing more units will increase the amount of fixed overhead costs absorbed and thus decrease the cost per unit. This will result in a higher net income for the period. Therefore, management may be tempted to overproduce in order to inflate net income.

When Absorption Costing Is Used, Management May Be Tempted to Overproduce