Question

When a firm prepares financial reports by using absorption costing,

a. profits will always decrease with decreases in sales.
b. profits will always increase with increases in sales.
c. profits may decrease with increased sales even if there is no change in selling prices and costs.
d. decreased output and constant sales result in increased profits?

Answer 1

When a firm prepares financial reports by using absorption costing, profits may decrease with increased sales even if there is no change in selling prices and costs. When you absorb costs that means all of the manufacturing costs are absurd by the units produced. The final cost of the inventory will include direct matters, labor and both variable and fixed overhead to product the units.