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?
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