Bhimani, Horngren,
Datar and Rajan,
Management and Cost Accounting, 5
th
Edition, Instructor’s Manual
© Pearson Education Limited 2012
3 a Absorption costing is more likely than variable costing to lead to stock buildups.
Under absorption costing, operating profit in a given accounting period is increased because some fixed manufacturing costs are accounted for as an asset stock) instead of as a cost of the current period.
b Although variable costing will counteract undesirable stock buildups, other measures can be used without abandoning absorption costing. Examples include budget targets and non-financial measures of performance such as maintaining
specific stock levels, stock turnovers, delivery schedules and equipment maintenance schedules.
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