Firms may choose to use absorption costing or variable costing for external financial reporting purposes.

Question

Quizplus · Accepted Answer

For external financial reporting purposes, firms are required to use absorption costing as it aligns with generally accepted accounting principles (GAAP), which mandate the inclusion of fixed manufacturing overhead in the cost of inventory. Variable costing, which excludes fixed manufacturing overhead from inventory costs, is not permitted for external reporting.

Firms May Choose to Use Absorption Costing or Variable Costing