The answer is "possible inventory obsolescence".

Here's why:

Absorption costing is a method of accounting where all of the costs of manufacturing, including both direct costs (like materials and labor) and indirect costs (like overhead), are absorbed by the units produced.

When management incentives are tied to income under this method, managers may be motivated to produce more units than are needed in the short term. This is because the more units that are produced, the lower the cost per unit (since fixed costs are spread over more units), which can increase reported income and, therefore, management incentives.

However, this can lead to a buildup of unsold inventory, which may become obsolete if it's not sold within a certain period. This is why "possible inventory obsolescence" is the correct answer.

"Decrease in incentives" and "decrease in storage costs" are not likely outcomes in this scenario. In fact, storage costs may increase due to the buildup of unsold inventory.

Question

The answer is "possible inventory obsolescence".

Here's why:

Absorption costing is a method of accounting where all of the costs of manufacturing, including both direct costs (like materials and labor) and indirect costs (like overhead), are absorbed by the units produced.

When management incentives are tied to income under this method, managers may be motivated to produce more units than are needed in the short term. This is because the more units that are produced, the lower the cost per unit (since fixed costs are spread over more units), which can increase reported income and, therefore, management incentives.

However, this can lead to a buildup of unsold inventory, which may become obsolete if it's not sold within a certain period. This is why "possible inventory obsolescence" is the correct answer.

"Decrease in incentives" and "decrease in storage costs" are not likely outcomes in this scenario. In fact, storage costs may increase due to the buildup of unsold inventory.

Knowee AI · Accepted Answer

The answer is "possible inventory obsolescence".

Here's why:

Absorption costing is a method of accounting where all of the costs of manufacturing, including both direct costs (like materials and labor) and indirect costs (like overhead), are absorbed by the units produced.

When management incentives are tied to income under this method, managers may be motivated to produce more units than are needed in the short term. This is because the more units that are produced, the lower the cost per unit (since fixed costs are spread over more units), which can increase reported income and, therefore, management incentives.

However, this can lead to a buildup of unsold inventory, which may become obsolete if it's not sold within a certain period. This is why "possible inventory obsolescence" is the correct answer.

"Decrease in incentives" and "decrease in storage costs" are not likely outcomes in this scenario. In fact, storage costs may increase due to the buildup of unsold inventory.

Multiple Choice QuestionIf management incentives are tied to income under absorption costing, which of the following may occur:Multiple choice question.decrease in incentivespossible inventory obsolescencedecrease in storage costs

Question

Solution

Similar Questions

Upgrade your grade with Knowee