Absorption costing is commonly used for internal reporting.

Question

Quizplus · Accepted Answer

Absorption costing is primarily used for external financial reporting and inventory valuation, as it includes all manufacturing costs (direct materials, direct labor, and both variable and fixed manufacturing overhead) in the cost of a product, which is a requirement under generally accepted accounting principles (GAAP). For internal reporting, companies often use variable or direct costing, which excludes fixed manufacturing overhead from product costs, providing management with information more relevant for decision making.

Absorption Costing Is Commonly Used for Internal Reporting