Final answer:
Absorption costing creates incentives for managers to increase production, but this can lead to ethical issues such as overproduction and waste of resources. One approach to address this is to consider the long-term sustainability of the business and incorporate social and environmental factors in decision-making.
Step-by-step explanation:
The decision managers make about the level of production can be influenced by the incentives created by absorption costing. Absorption costing is a method of allocating production costs to products, where both fixed and variable costs are included. This can create an incentive for managers to increase production in order to spread the fixed costs over a larger number of units, potentially increasing profitability.
However, there are ethical issues involved in this decision-making process. One ethical issue is the temptation for managers to manipulate production levels in order to achieve short-term financial goals. This can lead to overproduction and waste of resources, as well as potential negative impacts on the environment and stakeholders.
One approach to address this ethical issue is to encourage managers to consider the long-term sustainability of the business and to incorporate social and environmental factors in their decision-making. This can be done by adopting a triple bottom line approach, which takes into account not only financial performance but also social and environmental impacts of production.