Many companies that use absorption costing as their main means for inventory have been hit with growing inventory levels as a side effect. In breaking down this costing method, it appears that there is an incentive here for management to grow inventory balances to improve financial performance.
Consider these problems related to cost accounting and in a 1 page Word document, address the following points. Be sure to proofread your work prior to submitting to the drop box.
- Explain how absorption costing could provide undesirable incentives to management to build inventory.
- Include in your assessment how to best set up absorption costing systems to avoid this incentive and what types of measures and controls should be included to assist in its prevention.