Accounting

Option #2: Behavioral Considerations under Absorption versus Variable Costing

Stellar Packaging Products Company notes the following results for 2016 for variable versus absorption costing. The company’s base volume is 4,000,000.

The company presently uses absorption costing to provide additional compensation and incentivize managers to achieve their production goals. The compensation formula is 10% of operating income.

Instructions:

Calculate the amount of the difference of additional compensation between the two income statement methods. If the decline in volume continues and Stellar makes 3.6 million units in 2017, should the company switch to variable costing as the basis of compensation? Why or why not? What might be the reaction of the production managers if this occurs?

Your paper should meet the following requirements:

• 2-3 pages in length
• Formatted in accordance with APA
• Document your sources