Which costing method is required by GAAP for external reporting?

Which costing method is required by GAAP for external reporting?

• A. Variable costing.
• B. Full absorption costing.
• C. Direct costing.
• D. Throughput costing.

Answer: (B)

GAAP requires full absorption costing for external reporting. This method assigns all manufacturing costs to the products—both variable and fixed overhead—so inventory on the balance sheet includes a portion of fixed manufacturing overhead. When goods are sold, these fixed costs are recognized in cost of goods sold. This approach provides a consistent, accrual-based view of product costs and matching of expenses with revenues across periods. Variable costing, which excludes fixed overhead from product costs and expenses it in the period, and direct costing, which excludes fixed overhead from product costs entirely, do not meet external reporting requirements. Throughput costing focuses on throughput and is not used for GAAP-compliant external financial statements.

GAAP requires full absorption costing for external reporting. This method assigns all manufacturing costs to the products—both variable and fixed overhead—so inventory on the balance sheet includes a portion of fixed manufacturing overhead. When goods are sold, these fixed costs are recognized in cost of goods sold. This approach provides a consistent, accrual-based view of product costs and matching of expenses with revenues across periods.

Variable costing, which excludes fixed overhead from product costs and expenses it in the period, and direct costing, which excludes fixed overhead from product costs entirely, do not meet external reporting requirements. Throughput costing focuses on throughput and is not used for GAAP-compliant external financial statements.