When absorption costing is used and management bonuses are related to operating income, managers are more likely to
A)decrease inventory levels.
B)increase inventory levels.
C)keep inventory levels consistent.
D)steal from the company.

Question

Quizplus · Accepted Answer

With absorption costing, a portion of fixed manufacturing overhead is included in the cost of each unit produced, which means that as inventory levels increase, more fixed overhead costs are allocated to the cost of goods sold. This reduces the reported operating income and could lower the managers' bonuses. Therefore, managers are more likely to increase inventory levels to reduce the amount of fixed overhead allocated to the cost of goods sold, resulting in higher reported operating income and higher bonuses.

When Absorption Costing Is Used and Management Bonuses Are Related