Prompt 1 - Pick an company and consider its operations. We learned in class that absorption costing has a flaw in that operating income can be affected simply by manufacturing more or less units that what is sold. Now imagine that you're the CEO of the company you chose, you're going to retire at the end of the fiscal year, and the board of directors will give you a bonus based on the company's GAAP (absorption costing) operating income this year. You know because of your accounting background, that if you manufacture more units than you sell, the company's operating income will artificially increase this year (relative to producing the same number of units and you sell). It will subsequently artificially decrease next year if units produced is less than units sold, but that's the next CEO's problem. The Board of Directors do not realize that if they chose instead to base your bonus on variable costing operating income, you couldn't pull any funny business. I know you all are upstanding, non-confrontational, purely honest CEOs and would never dream of boosting your bonus by artificially altering the absorption costing operating income by frivolously increasing units produced far far in excess of what needs to be sold. However, your discussion question, if you were forced, is what would be your argument to an inquisitive auditor for producing so many units this year? This question isn't just a fun question. You have an opportunity to really examine how a business operates, and to argue for a given action. For example, if you're Nike, maybe you argue that you made a ridiculous number of shoes this year because next year, when hopefully the threat of COVID-19 has subsided your hypothesis is that everyone is going to want to get outdoors and spend more time than ever before in public places. Maybe also, since next year is the Summer Olympics, you expect everyone to be inspired and want to buy running shoes. Furthermore, maybe we at Nike are anticipating a number of our competitors to either reduce operations or go out of business due to slowing sales related to COVID, and we want to be there with shoes at the ready to capture our competitors' markets. Don't forget, there could also be cost reasons. So really think about your company, how they operate, and what their future holds. Prompt 1 - Pick an company and consider its operations. We learned in class that absorption costing has a flaw in that operating income can be affected simply by manufacturing more or less units that what is sold. Now imagine that you're the CEO of the company you chose, you're going to retire at the end of the fiscal year, and the board of directors will give you a bonus based on the company's GAAP (absorption costing) operating income this year. You know because of your accounting background, that if you manufacture more units than you sell, the company's operating income will artificially increase this year (relative to producing the same number of units and you sell). It will subsequently artificially decrease next year if units produced is less than units sold, but that's the next CEO's problem. The Board of Directors do not realize that if they chose instead to base your bonus on variable costing operating income, you couldn't pull any funny business. I know you all are upstanding, non-confrontational, purely honest CEOs and would never dream of boosting your bonus by artificially altering the absorption costing operating income by frivolously increasing units produced far far in excess of what needs to be sold. However, your discussion question, if you were forced, is what would be your argument to an inquisitive auditor for producing so many units this year? This question isn't just a fun question. You have an opportunity to really examine how a business operates, and to argue for a given action. For example, if you're Nike, maybe you argue that you made a ridiculous number of shoes this year because next year, when hopefully the threat of COVID-19 has subsided your hypothesis is that everyone is going to want to get outdoors and spend more time than ever before in public places. Maybe also, since next year is the Summer Olympics, you expect everyone to be inspired and want to buy running shoes. Furthermore, maybe we at Nike are anticipating a number of our competitors to either reduce operations or go out of business due to slowing sales related to COVID, and we want to be there with shoes at the ready to capture our competitors' markets. Don't forget, there could also be cost reasons. So really think about your company, how they operate, and what their future holds