A disadvantage of absorption costing is
A) that it is not a useful format for decision making.

B) that it might encourage inventory buildup.
C) both a and B
D) none of the above.

Question

A disadvantage of absorption costing is
A) that it is not a useful format for decision making.

B) that it might encourage inventory buildup.
C) both a and B
D) none of the above.

Quizplus · Accepted Answer

Absorption costing involves including fixed overhead costs in the cost of a product, which can incentivize companies to produce more inventory in order to spread those fixed costs over a larger number of units. This can lead to excessive inventory buildup, which can result in storage and carrying costs. Additionally, absorption costing does not provide useful information for decision making as it does not differentiate between fixed and variable costs, which can make it difficult to determine the true cost of a product and limit the ability to make informed decisions.

A Disadvantage of Absorption Costing Is