10 Questions
What is one of the problems with absorption costing?
It encourages overproduction for higher profits
In absorption costing, why does overproduction lead to lower total costs?
It shifts some fixed costs to the finished goods account on the balance sheet
Which costing method allocates all costs (variable and fixed) to products?
Absorption costing
What impact does overproduction have on the balance sheet under absorption costing?
Shifts some fixed costs to the finished goods account
What incentive does absorption costing create for managers in terms of production decisions?
Creates a bias towards overproduction
What potential issue arises when managers' performance is evaluated based on total costs?
Incentive for managers to overproduce
How does overproduction impact total variable costs in the short-term under absorption costing?
Leads to higher total variable costs initially
What is a long-term consequence of overproduction under absorption costing?
Increased total fixed costs in the long run
What is the main issue associated with overvalued stock due to overproduction under absorption costing?
Inaccurate reflection of production costs
How does overproduction affect production needs and costs in the long run under absorption costing?
Increases inventory, leads to declining production, and increases costs
Learn the fundamentals of activity-based costing (ABC) and how it helps in accurate cost allocation. Understand the five steps involved in implementing ABC, from obtaining information about activities to allocating costs effectively.
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