Question

A reason why absorption costing income statements are sometimes difficult to interpret is that ?

Answer 1

Absorption costing income statements can be challenging to interpret because they include fixed manufacturing overhead in product costs, leading to income fluctuations due to inventory level changes that do not align with actual economic performance.

Step-by-step explanation:

A reason why absorption costing income statements are sometimes difficult to interpret is that they include fixed manufacturing overhead as part of the cost of the products. Since these fixed overhead costs do not change with the level of production or sales, the fluctuation in inventory levels can lead to variations in reported net income, which doesn't necessarily reflect the company's actual economic performance during the period. Furthermore, because absorption costing allocates all manufacturing costs to products, regardless of whether they are fixed or variable, the income statement can show higher net income levels in periods where inventory increases, even if sales have not significantly increased.