1. Include nonfinancial as well as financial variables in the measures used to evaluate performance.

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

1. Focus on careful budgeting and inventory planning to reduce management's freedom to build up excess inventory.

2. Increase incentives for managers who increase operating income over a specific period of time.

None of the other options is correct.

1. Adopt variable costing, which reduces the incentives of managers to produce for inventory.

2. Focus the bonus plan for management based on absorption costing operating income.

1. Reduce the time period used to evaluate performance. By evaluating performance over a shorter time period, the incentive to maximize quarterly or annual income at the potential expense of long-run income in lessened.

2. Adopt an inventory holding charge for managers who tie up funds in inventory.