Managers whose bonuses are based on operating income have more incentive to increase inventory levels when variable costing is used than when absorption costing is used

Question

Quizplus · Accepted Answer

Under absorption costing, fixed manufacturing costs are included in inventory, which can increase operating income by increasing inventory levels. Variable costing does not include fixed manufacturing costs in inventory, so managers have less incentive to increase inventory for bonuses.

Managers Whose Bonuses Are Based on Operating Income Have More