Under absorption costing, if a manager's bonus is tied to operating income, then increasing inventory levels compared to last year would result in ________.
A) greater operating income and therefore increasing the manager's bonus
B) less operating income and therefore decreasing the manager's bonus
C) not affecting the manager's bonus
D) being unable to determine the manager's bonus using only the above information

Question

Quizplus · Accepted Answer

Under absorption costing, increasing inventory levels will result in higher operating income due to the allocation of fixed manufacturing overhead costs to inventory rather than expensing them in the current period. This will increase the manager's bonus if it is tied to operating income.

Under Absorption Costing, If a Manager's Bonus Is Tied to Operating