Question

If a manager’s bonus is tied to operating income, then decreasing inventory levels by producing less compared to last year would result in:

		A) an increase to the manager’s bonus under variable costing but not under absorption costing.
		B) an increase to the manager’s bonus under absorption costing but not under variable costing.
		C) a decrease to the manager’s bonus under absorption costing but not under variable costing.
		D) a decrease to the manager’s bonus under variable costing but not under absorption costing.
		E) no effect on the manager’s bonus.

Answer 1

The correct answer is option C i.e. a decrease to the manager’s bonus under absorption costing but not under variable costing.

If a manager’s bonus is tied to operating income, then decreasing inventory levels by producing less compared to last year would result in decrease to the manager's bonus under absorption costing but there will be no change in the manager bonus under variable costing.

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