Absorption Costing Utilized by Managers
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Critics of absorption cost have increasingly emphasized its potential for leading to undesirable incentives for managers. Give at least two examples and discuss.
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Solution Summary
This response is a brief discussion of how absorption costing can be utilized by managers to apply all the costs of a production process to the final cost of a manufactured product. Two different possible scenarios of undesirable consequences of absorption costing are provided. There is also a brief discussion of the possible advantages of using variable costing to more effectively analyze production costs.
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Question
Critics of absorption cost have increasingly emphasized its potential for leading to undesirable incentives for managers. Give at least two examples and discuss.
Introduction: The place to begin this discussion is to develop an understanding of absorption costing.
Absorption costing counts all the costs related to a production process as the cost of production. Absorption costing does not differentiate between variable or fixed manufacturing costs. Production costs include labor and other types of overhead related to a manufacturing process. These costs are then allocated proportionately to each unit that is produced (Absorption costing or full costing system, n.d.).
1. A method a manager may utilize with absorption costing that can lead to an undesirable outcome is when the manager orders ...
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