The managers of Mayo Company receive performance bonuses based on the net income of the firm. Which inventory costing method are they likely to favor in periods of declining prices?
A) LIFO
B) Average Cost
C) FIFO
D) Physical inventory method

Question

Quizplus · Accepted Answer

Managers of Mayo Company are likely to favor LIFO (Last-In-First-Out) inventory costing method in periods of declining prices because it will show higher cost of goods sold (COGS) on the income statement, resulting in a lower net income. This lower net income will decrease the bonus paid to the managers. With LIFO, the inventory that is sold first is considered to be the most recently purchased, and as prices are declining, the cost of the most recently purchased inventory will be higher, leading to a higher COGS and a lower net income.

The Managers of Mayo Company Receive Performance Bonuses Based on the Net