Direct costing conforms with generally accepted accounting principles.

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Direct costing, also known as variable costing, is not in conformity with generally accepted accounting principles. Under GAAP, all costs, including fixed manufacturing overhead costs, should be included in inventory and expensed only when the inventory is sold. However, under direct costing, only variable costs are included in inventory and fixed costs are expensed in the period incurred. This can lead to differences in net income under direct costing and absorption costing (which includes all costs), making it less reliable for external financial reporting purposes.

Direct Costing Conforms with Generally Accepted Accounting Principles