Chapter 9 Objective 3 – Flashcards
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Which of the following is a reason for companies to use absorption costing for internal accounting?
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It can help prevent managers from taking actions that make their performances measure look good but that hurt the income they report to shareholders
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Many companies have switched from absorption costing to variable costing for internal reporting
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To reduce the undesirable incentive to build up inventories
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Ways to "produce for inventory" that result in increasing operating income include _____.
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Deferring maintenance to accelerate production.
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Switching production to products that adsorb the highest amount of fixed manufacturing costs is also called
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Cherry picking
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To discourage producing for inventory, management can
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Incorporate a carrying charge for inventory in the internal accounting system
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Under variable costing, if a manager's bonus is tied to operating income, then increasing inventory levels compared to last year would result in ________.
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Not affecting the manager's bonus
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Critics of absorption costing suggest evaluating management on its ability to ________.
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Decrease fixed costs
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Which of the following inventory costing methods shown below is most likely to cause undesirable incentives for managers to build up finished goods inventory?
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Absorption costing
