Which of the following is a reason for companies to use absorption costing for internal accounting?
A) It is the required inventory method for internal accounting as per GAAP.
B) It measures the cost of all resources, whether manufacturing or nonmanufacturing, necessary to produce inventory.
C) It does not take into account fixed manufacturing overhead while valuing inventory and hence is more suited for decision making.
D) It can help prevent managers from taking actions that make their performance measure look good but that hurt the income they report to shareholders.

Question

Quizplus · Accepted Answer

Absorption costing includes all manufacturing costs, including fixed manufacturing overhead, in the cost of a product. This approach can prevent managers from taking actions that reduce inventory and thus fixed overhead allocation in the short term (making performance look better) but could be detrimental to the reported income over the long term, as it ensures that all costs of production are accounted for in the product cost.

Which of the Following Is a Reason for Companies to Use