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when sales fluctuate but production is constant,how does absorption costing smooth out fluctuations in profits?
This is because the overhead costs are released to the profit and loss account only when the product is sold, so sales income is matched with costs.
The other option would be marginal cost where overheads are invoiced in each period. Meaning that in months of high production – large overhead deductions will be made from profits, even though the products are not necessarily sold that period ( can be stocking up for next season)l
Deducting all the costs in full in the period can cause swings in profit .Hope thats ok & thanks for you question
Cath
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