Question

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Using absorption costing for segmented income statements can lead to ______.

Answer 1

Using absorption costing for segmented income statements can lead to inaccurate cost allocation, distorted segment profitability, and hindered decision-making.

Step-by-step explanation:

Using absorption costing for segmented income statements can lead to several outcomes:

• Overhead costs may not be accurately allocated - absorption costing assigns fixed overhead costs to products based on the volume of production. If the volume of production varies significantly across segments, the allocation of overhead costs may not represent the actual consumption of resources by each segment.
• Segment profitability may be distorted - absorption costing includes fixed overhead costs in the cost per unit of production. This may lead to segments with lower sales volumes appearing less profitable compared to segments with higher sales volumes, even if they contribute more to the overall profitability of the business.
• Difficulty in making informed decisions - inaccurate allocation of costs and distorted segment profitability can result in misleading information for decision-making. This hinders the ability to make informed decisions regarding resource allocation, product pricing, and segment performance evaluation.