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 1-2 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.
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