Using absorption costing for segmented income statements can lead to:

• A. Accurately matching revenues and expenses for each segment.
• B. Overstating the profitability of individual segments due to the allocation of common fixed costs.
• C. Understating total company net income.
• D. Eliminating the need for allocation of fixed costs.

Answer: (B)

Verified step by step guidance

1. Understand the concept of absorption costing: Absorption costing is a method where all manufacturing costs, including fixed and variable costs, are allocated to products. This method can lead to challenges in segmented income statements due to the allocation of common fixed costs.
2. Recognize the issue with common fixed costs: Common fixed costs are costs that are shared across multiple segments and cannot be directly traced to a specific segment. When these costs are allocated arbitrarily, it can distort the profitability of individual segments.
3. Analyze the impact on profitability: Allocating common fixed costs to individual segments can overstate the profitability of some segments while understating others. This happens because the allocation may not accurately reflect the actual usage or benefit derived by each segment.
4. Understand the implications for total company net income: Absorption costing does not inherently understate total company net income. Instead, it affects the perceived profitability of individual segments due to the allocation method used for fixed costs.
5. Recognize the need for careful allocation: Absorption costing does not eliminate the need for allocation of fixed costs. Instead, it requires careful consideration to ensure that the allocation method used is fair and reflects the actual operations of the company.