Evaluating and rewarding managers based on absorption basis income can lead to overproduction.

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Quizplus · Accepted Answer

Absorption basis income includes all manufacturing costs, regardless of whether the goods are sold or not. This can incentivize managers to overproduce in order to maximize their income, rather than focusing on producing the optimal amount that is most profitable for the company. This can lead to an excess of inventory and additional storage and holding costs. Therefore, using absorption basis income to evaluate and reward managers can lead to overproduction.

Evaluating and Rewarding Managers Based on Absorption Basis Income Can