Just How Much Does the Tail Wag the Dog? Altering Inventory to Manage Earnings

Using absorption costing, manufacturing firms can alter production (relative to sales) to shift fixed costs between cost of goods sold and inventory accounts, thereby managing earnings either upward or downward. The accounting‐oriented benefits of such a strategy are met with operations‐oriented costs (e.g., carrying costs, inventory obsolescence, and/or stock outages), creating business frictions between accounting and operations. We use a...