Absorption Costing and Manipulation of Profit

Absorption Costing and Manipulation of Profit

The profit can easily be manipulated in absorption costing by changing the value of closing stock . The stock valuation consist of overhead element which can easily be manipulated by management for the stock valuation purposes.

The overhead absorption rate is very much at the discretion of the management and management can change the absorption rate to get the desired results. Whereas in case of Marginal costing management does not have this opportunity because overheads are charged as period cost.

1.Increase in Stock

If more value of closing stock is increased then it will increase the profit of the entity because some portion of the cost in current period will be stored in closing stock and will be charged next year.

2. Decrease in Stock

Similarly if the closing stock is valued at less amount then maximum expenses are charged in this period and this will reduce the current year profit.