How is absorption costing treated under GAAP?
Absorption costing is by GAAP because the product cost includes fixed overhead. Variable costing considers the variable overhead costs and does not consider fixed overhead as part of a product’s cost. It is not by GAAP because the fixed overhead is treated as a period cost and is not included in the cost of the product. In addition, the use of absorption costing generates a situation in which simply manufacturing more items that go unsold by the end of the period will increase net income. Because fixed costs are spread across all units manufactured, the unit fixed cost will decrease as more items are produced. Absorption Costing vs. Variable Costing When we prepare the income statement, we will use the multi-step income statement format. Absorption costing provides a more accurate,…