Moral Hazard

question 135

Multiple Choice

Moral hazard:

• A) occurs when incentives are distorted because an individual knows more about his or her own actions than other people do.
• B) is a term used to describe the bonuses paid for particularly hazardous jobs (such as firefighting).
• C) is a term used synonymously with value judgement.
• D) refers to the questionable morality of price gouging in hazardous times (e.g. ,in the presence of famines or floods).

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Definitions:

Variable Manufacturing Costs

Expenses that fluctuate with production output levels, including raw materials, direct labor, and utility costs directly involved in the manufacturing process.

Predetermined Fixed Overhead

A budgeted or estimated amount of fixed overhead costs, used to allocate overhead costs to products or services.

Variable Costing

A costing method that includes only variable costs—direct materials, direct labor, and variable manufacturing overhead—in the cost of a unit of product, excluding fixed overhead costs.

Absorption Costing

Absorption Costing is a method of inventory costing that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed manufacturing overhead - in the cost of a product.