A production foreman who receives a bonus based on operating income would have no incentive to increase production and stock pile inventories if the company reports under the variable costing method.

Question

Quizplus · Accepted Answer

Under the variable costing method, only variable production costs are included in product costs, and fixed manufacturing overhead is treated as a period expense. Therefore, increasing production to stockpile inventories would not directly increase operating income, as the fixed costs associated with production would still be expensed in the period incurred, not capitalized in inventory. This means the foreman's bonus, which is based on operating income, would not benefit from merely increasing production without corresponding sales.

A Production Foreman Who Receives a Bonus Based on Operating