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Discuss possible ways for manipulating profits under the absorption costing system and if you find using...

Discuss possible ways for manipulating profits under the absorption costing system and if you find using these techniques ethically acceptable.

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Expert Solution

It is easy to manipulate profit in absorption costing by making change in the value of closing stock. There is overhead element in the stock valuation that can easily be manipulated by management for the purpose of stock valuation. It is at the discretion of the management to change the absorption rate to get the desired results. However, the management in case of marginal costing management does not have this opportunity as overheads in marginal costing are charged as period cost.

If the value of closing stock is increased then there will increase the profit also because some portion of the cost in current period that is included in closing stock will be charged next year.

In the same way, if the value closing stock is decreased then maximum amount of expenses are charged in to the current period and this will reduce the current year profit.

These techniques for manipulating profits under the absorption costing are ethically acceptable.

ekkarill92 answered 1 year ago
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