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

This statement is false. When using variable costing, increasing inventory levels would decrease operating income as fixed manufacturing costs would be shifted to future periods. Therefore, managers would have less incentive to increase inventory levels under variable costing compared to absorption costing where fixed manufacturing costs are included in inventory and would increase operating income.

Managers Whose Bonuses Are Based on Operating Income Have More