Multiple Choice QuestionA system of rewarding managers by linking bonuses to income computed under absorption costing may result in:Multiple choice question.no effect on inventoryinsufficient inventorysales negatively affectedexcess inventory buildup
Question
Multiple Choice QuestionA system of rewarding managers by linking bonuses to income computed under absorption costing may result in:Multiple choice question.no effect on inventoryinsufficient inventorysales negatively affectedexcess inventory buildup
Solution
The correct answer is "excess inventory buildup."
Here's why:
Absorption costing is a method of inventory costing in which all variable and fixed manufacturing costs are included as inventoriable costs. This means that these costs are included in the cost of inventory and are not recognized as expenses until the inventory is sold.
If managers are rewarded based on income computed under absorption costing, they might be incentivized to produce more inventory than necessary. This is because the more inventory they produce, the more costs are included in the cost of inventory, which reduces the cost of goods sold and increases the income.
Therefore, this system may result in excess inventory buildup as managers produce more to increase their bonuses.
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