the evaluation of managers is often tied to the profitability of the units they control. how income changes from one period to the next and how actual income compares with planned income are frequently used as signals of managerial ability. to be meaningful signals, however, income should reflect manage-rial effort. for example, if a manager has worked hard and increased sales while holding costs in check, income should increase over the prior period, signaling success. in general terms, if income performance is expected to reflect manage-rial performance, then managers have the right to expect the following,
1. as sales revenue increases from one period to the next, all other things being equal, incom should increase.
2. as sales revenue decreases from one period to the next, all other things being equal, income should decrease.
3. as sales revenue remains unchanged from one period to the next, all other things being equal p, income should remain unchanged.
variable costing does ensure that the above relationships hold, however, absorption costing may not. to illustrate, assume that a division has the following operating data for its first two years (for simplicity, we assume no selling and administrative expenses)
the evaluation of managers is often tied to the profitability of the units they control. how income changes from one period to the next and how actual income compares with planned income are frequently used as signals of managerial ability. to be meaningful signals, however, income should reflect manage-rial effort. for example, if a manager has worked hard and increased sales while holding costs in check, income should increase over the prior period, signaling success. in general terms, if income performance is expected to reflect manage-rial performance, then managers have the right to expect the following,
1. as sales revenue increases from one period to the next, all other things being equal, incom should increase.
2. as sales revenue decreases from one period to the next, all other things being equal, income should decrease.
3. as sales revenue remains unchanged from one period to the next, all other things being equal p, income should remain unchanged.
variable costing does ensure that the above relationships hold, however, absorption costing may not. to illustrate, assume that a division has the following operating data for its first two years (for simplicity, we assume no selling and administrative expenses)
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