Question

Which method do you think allows for the greatest manipulation of net income: variable or absorption costing and why? Discuss any ethical concerns associated with your answer.

Answer 1

According to me, absorption costing allows for the greatest manipulation of net income.In absorption costing, we consider both variable and fixed costs. Here, the managers can do various things to project that the

Some of the unethical practices that the managers can adhere to are:-

1. Certain expenses such as rent of building, lease rentals are paid on prepaid basis. Managers can postpone these expenses to show more profits in that certain period by reducing their costs.

2. Here, along with material and labor, certain overheads are also included in the total cost of the production. In such case, managers can include the costs which actually do not belong in the total cost.

3. Also, the managers can easily manipulate the profits by increasing or decreasing the fixed cost apportioned.

4. They can change the method of calculating overheads so as to inflate the profits and reduce the cost of product.