Under absorption costing,if a manager's bonus is tied to operating profit,then increasing inventory levels compared to last year would result in:
A)increasing the manager's bonus.
B)decreasing the manager's bonus.
C)not affecting the manager's bonus.
D)being unable to determine the manager's bonus using only the above information.

Question

Quizplus · Accepted Answer

Under absorption costing, inventory costs are included in the cost of goods sold and lower inventory levels would result in higher cost of goods sold, and therefore, lower operating profit. If the manager's bonus is tied to operating profit, then increasing inventory levels would lead to higher operating profit and ultimately, higher bonus for the manager.

Under Absorption Costing,if a Manager's Bonus Is Tied to Operating