During the current fiscal year, the CEO has noticed the factory manager has been producing more units than what the budgeted called for. The factory manager’s bonus is based on absorption costing operating income, so the CEO assumes he has the best interest of the firm in mind when making these production decisions. What advice would you give to the CEO? (For each of the following phrases, indicate “True – give this advice to CEO” or “False – do not give this advice to CEO”

- A. B.	The factory manager adjusted the production levels because he was anticipating the needs of the company.
- A. B.	The factory manager is acting in his best interest because of how his compensation is structured
- A. B.	Absorption costing is the best base for the factory manager’s compensation
- A. B.	The CEO should consider using variable costing to incentivize the factory manager
- A. B.	The manager is inflating production levels to increase the COGS per unit.

A.	True – give this advice to CEO
B.	False – do not give this advice to CEO