Which of the following inventory costing methods is most likely to cause undesirable incentives for managers to build up finished goods inventory?
A)Absorption costing
B)Direct costing
C)Variable costing
D)Throughput costing

Question

Quizplus · Accepted Answer

Absorption costing includes fixed overhead costs in the cost of production, which means that the more inventory a company has on hand, the lower its reported net income will be. This creates an incentive for managers to build up finished goods inventory in order to lower their reported net income and potentially trigger bonus thresholds or meet other performance incentives. Direct costing, variable costing, and throughput costing are less likely to create such incentives as they only include variable costs in inventory valuations.

Which of the Following Inventory Costing Methods Is Most Likely