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

B. What denominator level capacity concepts emphasize the output a plant can supply? What denominator- level capacity concepts emphasize the output customers demand for products produced by a plant?

Answer:

A. 

Change the accounting system:

----adopt either variable or through-put costing, both of which reduce the incentives of managers to produce for inventory

---adopt an inventory holding charge for managers who tie up funds in inventory

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

Include non-financial as well as financial variable in the measures used to evaluate performance

B. 

*The theoretical capacity and the practical capacity concepts emphasize the output a plant can supply

*The normal capacity utilization and the master-budget-capacity utilization concepts emphasize the demand for a plant's output