A. What are the factors that affect the break-even point under:(a) variable costing and(b) absorption costing?

B. Critics of absorption costing have increasingly emphasized its potential for leading to undesirable incentives for managers. Give an example.

Answer:

A. 

1. 1. Under Variable Costing--
      1. Fixed (manufacturing and operating) costs
      2. Contribution Margin per unit
   2. Under Absorption Costing--

1.Fixed (manufacturing and operating) costs

2. Contribution Margin per unit

3. Production level in units in excess of break- even sales in units

4. Denominator level chosen to set the fixed manufacturing cost rate

B.

Examples of dysfunctional decisions managers may make to increase reported income are:

1. Plant managers may switch production to those orders that absorb the highest amount of fixed manufacturing overhead, irrespective of the demand by customers
2. Plant managers may accept a particular order to increase production even though another plant in the same company is better suited to handle that order.
3. Plant managers may defer maintenance beyond the current period to free up more time for production