Answer the following question(s)using the information below.Heinrich Corporation budgeted fixed manufacturing costs of $6,000 during 2012.Other information for 2012 includes:
The company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted denominator level.Manufacturing variances are closed to cost of goods sold.
-Which of the following is a weakness particular to the absorption costing method?
A)A production manager cannot manipulate operating income.
B)A manager is always encouraged to match the production schedule to estimated demand.
C)A manager may be encouraged to switch production to difficult to manufacture products.
D)A downward demand spiral can be created.
E)A manager may be encouraged to defer maintenance.

Question

Answer the following question(s)using the information below.Heinrich Corporation budgeted fixed manufacturing costs of $6,000 during 2012.Other information for 2012 includes:
  The company uses absorption costing and the fixed manufacturing cost rate is based on the budgeted denominator level.Manufacturing variances are closed to cost of goods sold.
-Which of the following is a weakness particular to the absorption costing method?
A)A production manager cannot manipulate operating income. 
B)A manager is always encouraged to match the production schedule to estimated demand. 
C)A manager may be encouraged to switch production to difficult to manufacture products. 
D)A downward demand spiral can be created. 
E)A manager may be encouraged to defer maintenance.

Quizplus · Accepted Answer

Absorption costing can lead to a downward demand spiral, where a decrease in demand results in less production, leading to higher unit costs and higher prices, which can further decrease demand. This is because fixed manufacturing costs are included in the cost of each unit produced, so a decrease in production volume leads to a higher per-unit cost.

Answer the Following Question(s)using the Information Below