Why does GAAP not allow variable costing?

Variable costing is not accepted by GAAP because it reports a lower taxable figure as inventory increases. In the eyes of the Internal Revenue Service, lower taxable income means less tax revenue.

Is Activity Based Costing GAAP?

The fact that ABC is not GAAP usually means that a company that wishes to benefit from ABC must develop one costing system for external reporting and another for internal management.

What are the criticisms of Activity Based Costing?

A primary disadvantage of ABC is that it is not possible to divide some overhead costs such as the chief executive’s salary on a per-product usage basis. (1) ABC will be of limited benefit if the overhead costs are primarily volume related or if the overhead is a small proportion of the overall cost.

Can Activity Based Costing be used to value inventory?

The above reviews revealed that ABC is used for inventory control and valuation but it has not justified that its use has increased the quality of information regarding inventory control.

Why does US GAAP prefer absorption costing?

Absorption costing “absorbs” all of the costs used in manufacturing and includes fixed manufacturing overhead as product costs. Absorption costing is in accordance with GAAP, because the product cost includes fixed overhead.

Why does GAAP use absorption costing?

Some of the primary advantages of absorption costing are that it complies with generally accepted accounting principles (GAAP), recognizes all costs involved in production (including fixed costs), and more accurately tracks profit during an accounting period.

Why do the Activity-Based Costing is not used for external reporting?

Activity-based costing is not used for external reporting because: – external reports are less detailed than internal reports. – ABC does not comply with GAAP. – it is difficult to make changes in the existing accounting system.

What are some of the limitations of Activity-Based Costing systems?

What are some of the limitations of activity-based costing systems? Managers and employees may resist the change to ABC. ABC procedures produce numbers that do not match traditional costing. ABC requires substantial resources.

What are some disadvantages of using an activity based costing system?

Disadvantages of Activity-Based Costing

• Collection and preparation of data is time-consuming.
• Costs more to accumulate and analyze information.
• Source data isn’t always readily available from normal accounting reports.

What is Activity Based Costing All About describe the issues involved and limitations of Activity Based Costing?

Activity-based costing (ABC) is a method of assigning overhead and indirect costs—such as salaries and utilities—to products and services. The cost driver rate, which is the cost pool total divided by cost driver, is used to calculate the amount of overhead and indirect costs related to a particular activity.

What are some of the limitations of activity-based costing systems?

Why is activity-based costing more accurate?

Activity based costing systems are more accurate than traditional costing systems. This is because they provide a more precise breakdown of indirect costs. However, ABC systems are more complex and more costly to implement. The leap from traditional costing to activity based costing is difficult.