BUSINESS ADMINISTRATION
ACCOUNTING FOR MANAGEMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Sales quantity is higher than Production Quantity
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Sales quantity is lower than Production Quantity
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Actual Production is higher than Normal Production
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Actual Production is lower than Normal Production
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Detailed explanation-1: -Absorption costing can cause a company’s profit level to appear better than it actually is during a given accounting period. This is because all fixed costs are not deducted from revenues unless all of the company’s manufactured products are sold.
Detailed explanation-2: -If production exceeds sales, the profit under absorption costing is higher as compared to variable costing. This is due to the deferral of fixed manufacturing overhead costs to the next period in ending inventory, leading to reduced cost of goods sold for the current period and hence a higher profit.
Detailed explanation-3: -The fundamental difference between the two systems is one of timing. The direct costing model takes all the fixed cost to the income statement immediately. The absorption costing model assigns the fixed cost to units produced during the period.
Detailed explanation-4: -When the number of units produced is higher than the number of units sold absorption profit will be higher than marginal profit When the number of units produced is less than the number of units sold absorption profit will be lower than marginal profit.