Which of the following inventory costing methods shown below is most likely to cause undesirable incentives for managers to build up finished goods inventory?
A) absorption costing
B) variable costing
C) throughput costing
D) direct costing

Question

Quizplus · Accepted Answer

Absorption costing includes all manufacturing costs, including fixed manufacturing overhead, in the cost of finished goods inventory. As a result, because fixed manufacturing overhead costs are allocated based on production volume, there is a tendency for managers to build up finished goods inventory to reduce overhead per unit and improve reported profitability. This can lead to undesirable incentives for managers to increase production volume beyond what is necessary to meet demand, which can result in excess inventory accumulation and increased storage costs. Variable costing and throughput costing do not allocate fixed manufacturing overhead to the cost of finished goods, so they are less likely to create such incentives. Direct costing is another term for variable costing, so it also does not allocate fixed manufacturing overhead to the cost of finished goods inventory.

Which of the Following Inventory Costing Methods Shown Below Is