Under absorption costing, increases or decreases in operating income due to changes in inventory levels could be misinterpreted to be the result of operating efficiencies or inefficiencies.

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Under absorption costing, fixed manufacturing overhead costs are allocated to products. Therefore, when inventory levels increase, some of these costs are deferred in inventory, leading to higher operating income, and vice versa when inventory levels decrease. This can make it appear as if there were changes in operating efficiency when in fact the changes are due to inventory level fluctuations.

Under Absorption Costing, Increases or Decreases in Operating Income Due