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When sales fluctuate but production is constant, absorption costing smoothes out profit fluctuations?
how is this possible, I think profit would also fluctuate!
The profit will fluctuate as the sales fluctuate.
What the statement means is that it will not fluctuate as much as it would if marginal costing was used.
Which of the following are arguments in favour of the use of absorption costing?
(i) Closing inventory is valued in accordance with accounting standards.
(ii) There is no under or over absorption of overheads.
(iii) When sales fluctuate but production is constant, absorption costing smoothes out profit fluctuations.
A (i) only
B (i) and (ii)
C (i) and (iii)
D (ii) and (iii)please help me with this
Why are you attempting a question for which you do not have an answer? You should be using a Revision Kit from one of the ACCA Approved Publishers – it has answers and explanations.
(i) is true. As I explain in my free lectures, in financial accounting we must value inventory using absorption costing.
(ii) is not true. As again I explain in my lectures, a problem with absorption costing is that there will be an under or over absorption if the actual production is different from the budgeted production.
(iii) is true and I have already stated in my previous reply.
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