Multiple Select QuestionSelect all that applyIf management incentives are tied to income under absorption costing, which of the following may occur (select all that apply):Multiple select question.increased financing costsdecrease in storage costspossible obsolescenceincreased storage costs.decrease in incentives
Question
Multiple Select QuestionSelect all that applyIf management incentives are tied to income under absorption costing, which of the following may occur (select all that apply):Multiple select question.increased financing costsdecrease in storage costspossible obsolescenceincreased storage costs.decrease in incentives
Solution
The possible outcomes when management incentives are tied to income under absorption costing could be:
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Decrease in storage costs: This might not necessarily occur. Management might produce more units to absorb fixed manufacturing costs, which could actually increase storage costs if the produced units are not sold.
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Possible obsolescence: This could occur. If management produces more units to absorb fixed manufacturing costs and these units are not sold quickly, they may become obsolete.
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Increased storage costs: This is likely to occur. As mentioned above, management might produce more units to absorb fixed manufacturing costs. If these units are not sold, they would need to be stored, increasing storage costs.
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Decrease in incentives: This might not necessarily occur. If management is successful in increasing income by producing more units, their incentives might actually increase.
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Increased financing costs: This could occur. If more units are produced to absorb fixed manufacturing costs, the company might need to finance the production of these units, increasing financing costs.
So, the options that apply are "possible obsolescence", "increased storage costs", and "increased financing costs".
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