Absorption costing can lead managers to mistakenly believe that fixed manufacturing overhead costs will:

Question

BlackTom AI · Accepted Answer

First, let's restate the question and the options to ensure clarity about what's being evaluated.
Question: Absorption costing can lead managers to mistakenly believe that fixed manufacturing overhead costs will:
Options:
1) remain the same in total as the number of units produced increases.
2) decrease in total as the number of units produced increases.
3) increase in total as the number of units produced increases.

Now, evaluate each option one by one with the concept in mind.
Option 1: 'remain the same in total as the number of units produced increases.' Under absorption costing, fixed manufacturing overhead is allocated to units produced; the total fixed overhead cost does not change with the level of production. What changes is the allocation per unit, which decreases as more units are produced, but the total amount allocated across all units remains constant. This makes option 1 align with the true behavior of fixed MOH under absorption costing, not a mistake.
Option 2: 'decrease in total as the number of units produced increases.' This would imply that total fixed MOH declines when more units are produced, which is not how fixed costs behave. Fixed costs are constant in total regardless of activity; only the allocation per unit changes. Therefore, this option describes a misconception about fixed costs under absorption costing.
Option 3: 'increase in total as the number of units produced increases.' This would imply that fixed MOH grows with production, which contradicts the nature of fixed costs and the allocation mechanics in absorption costing. The total fixed cost remains fixed; increasing activity does not create more fixed overhead in total.

To sum up, the core concept here is that fixed manufacturing overhead is constant in total, but its per-unit allocation decreases as production expands. The only option that reflects a misperception consistent with common misunderstandings is option 1, as a manager might think the total stays the same when in reality the total is unchanged and the per-unit cost changes with volume. The other two options describe incorrect behaviors that do not match fixed-cost economics under absorption costing.

Absorption costing can lead managers to mistakenly believe that fixed manufacturing overhead costs will:

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