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Part $1$

What are two ways of reducing the negative aspects associated with using absorption costing to evaluate the performance of a plant$$ manager?

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Part $1$

A$.$

Focus on careful budgeting and inventory planning to reduce$$ management's freedom to build up excess inventory.

Increase incentives for managers who increase operating income over a specific period of time.

B$.$

Adopt either variable or throughput$$ costing, both of which reduce the incentives of managers to produce for inventory.

Focus the bonus plan for management based on absorption costing operating income.

C$.$

Include nonfinancial as well as financial variables in the measures used to evaluate performance.

Extend the time period used to evaluate performance. By evaluating performance over a longer time period$($say$,3$ to $5$ years$),$ the incentive to take$$ short$-$run actions that reduce$$ long$-$term income is lessened.

D$.$

Reduce the time period used to evaluate performance. By evaluating performance over a shorter time$$ period, the incentive to maximize quarterly or annual income at the potential expense of$$ long$-$run income in lessened.

Adopt an inventory holding charge for managers who tie up funds in inventory.