If a Company Uses Standard Absorption Costing, How Could a Business

question 165

Multiple Choice

If a company uses standard absorption costing, how could a business manager exploit that accounting method in order to boost book income without violating the rules of GAAP?

• A)By adopting just-in-time inventory management, the manager could reduce the costs of financing and storing inventory, which would in turn, help boost book income.
• B)By coding administrative costs to inventory, the manager could report lower total expenses and thus report higher income.
• C)By reducing inventory levels, the manager could show higher sales revenues, and thus report higher book income.
• D)By building up inventory levels, fixed manufacturing costs could be "stored up" in ending inventory, the cost of goods sold would be lower, and book income would be higher.

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Definitions:

Total Cost Function

A mathematical expression that calculates the total cost of producing a given level of output, incorporating both fixed and variable costs.

Marginal Cost

The surplus cost attributed to generating one more unit of a product or service.

Production Function

A mathematical representation showing the relationship between input factors and the output of goods or services.

Competitive Markets

Markets characterized by many buyers and sellers, where no single participant has significant influence on price or product offerings.