Question

LO 6.5Why is absorption costing the method allowable for GAAP?

Answer 1

Answer:

Explanation: Absorption Costing is the accepted method of of product costing because it takes into account all costs related to the production which includes all variable and fixed costs.

Using the absorption costing method, all normal manufacturing costs are treated as product costs and subsequently included as inventory in the financial statements. All Inventory costs are reflected in the income statement and the balance sheet.

while the use of variable costing method is not accepted because it only considers the variable costs, direct material and direct labour and leave out all fixed costs which is not accepted by GAAPS.