Absorption of Fixed Costs

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Absorption of Fixed Costs
How does production affect the absorption of fixed costs?

Absorption of Fixed Costs
The more your produce, the more your fixed costs are 'diluted', and therefore minimized at a 'per unit' level.
Absorption Costing is a very dangerous accounting system, as it can drive to increase production to an unnecessary level, to reduce cost per unit... But bringing to inventory increase!
The more you produce, the more 'absorption profit' you generate. But if you do not sell what you produced, it is just a virtual profit.



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