Because your division has a high amount of fixed costs, you are aware that a way to increase the current years profits is to overproduce. That is, a lower fixed cost per unit could be obtained by spreading the division's fixed costs over a larger amount of output than is needed to meet customer demand. Sure, you'd end up with excess inventory, but a good portion of your fixed costs would be deferred into the inventory balance sheet account. This would also lower the cost of goods sold, thereby increasing net operating income for the year. By producing 10% more output than is needed, your divisions profits would reach the current years targeted level, on which your bonus is based.

Required:

Share your responses to the following questions with your classmates: ANSWER THIS

1. What are some of the ethical and accounting issues you identified as you've learned about variable and absorption costing?
2. What are the risks involved in overproducing to meet short term profit targets?