- This topic has 3 replies, 2 voices, and was last updated 8 months ago by
John Moffat.
John Moffat.-
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johnbriane
- Topics: 146
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sir whats the reason for when the inventory levels being increased the profits are also increasing ?
is it because the cost of sales are low ?
John Moffat
- Topics: 57
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That is only the case when we are using absorption costing.
Because the unit cost includes the absorption of fixed overheads, the more that are produced then the lower the cost per unit and hence the greater the profit. That is fine is they are selling all their production, but if they are producing more than they sell then inventories will increase. Again, this is not really a problem if they sell the inventory in the next period, but there is a problem if the keep increasing the inventory because they might end up never being able to sell it.
johnbriane
- Topics: 146
- Replies: 147
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so in a way having more inventories is bad eventhough profits will increase when calulations are done
John Moffat
- Topics: 57
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A company should really only increase inventory if they are expecting to sell more.
johnbriane
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