How can using absorption costing can lead to unethical practices due to misrepresentation?
Absorption costing is a form of costing that includes all fixed and variable costs into the cost of manufacturing an item, including labor, materials and overhead costs. When this is used on an income statement, it is possible to develop unethical practices through the misrepresentation of the costs and can be used to misrepresent financial statements.
Absorption costing can lead to misrepresentation of costs in the income statement. Overhead costs are included in the total cost of production and become a part of manufacturing costs. They become part of costs to which they don't belong.
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