Question #1

a) Under which inventory costing method would managers have an incentive to build excess inventory? What is it about that method that provides the incentive? Be sure to justify your answer.

b) What steps can a manager take to reduce the incentive to build excess inventory? Be specific!

Question #2

a) How does the choice of the denominator level capacity impact income reported under variable costing? Be sure to justify your answer.

b) How does the choice of the denominator level capacity impact income reported under full absorption costing? Be sure to justify your answer.