Steve Smith has completed an evaluation of the effects of a favorable production volume variance from the prior period. He proposes to Roberta Blake that the use of a variable costing income statement rather than an absorption costing income statement for the basis calculating incentive rewards would encourage more ethical behavior, when rewards are based on operating income.
Do you agree with Smith's suggestion?
Are there any reporting considerations which impact the preparation of a variable costing income statement?
If Blake and Smith agree that only absorption costing is appropriate, are there any methods to fairly capture the effect of increased inventories during times of overproduction?