Misstate financials: Full-Absorption Costing
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Explain how full-absorption costing can be abused by management to misstate financial results. Be sure to distinguish the difference between absorption costing and variable costing, and the impact on inventoried costs before you explain how absorption costing can be abused by management.
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Solution Summary
Your discussion is 251 words and gives an example to show how over producing can reduce the cost per unit and create misleading results.
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Absorption vs. Variable Costing
GAAP requires use of absorption, that is, including fixed overhead in each unit. Variable costing treats fixed manufacturing overhead as a period cost (expense it when incurred, not inventoried). So, under absorption costing, when management produces, some of the fixed cost of capacity (like rent) is recorded as an asset (in inventory on the balance sheet) rather than ...
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