Analysts must be aware that with the use of absorption costing,as inventory absorbs more fixed costs,reported income tends to decrease.

Absorption Costing

An accounting method that includes all direct and indirect manufacturing costs in the cost of a product.

Fixed Costs

Costs that do not change with the volume of production or sales, such as rent, salaries, and insurance.

Reported Income

The income that a company officially reports on its income statement, which has been calculated according to the applicable accounting standards.