A Level Accounting (9706)•9706/12/M/J/23
Explanation
Absorption Costing for Full Cost Allocation Steps:
- Recall absorption costing includes all manufacturing costs (variable and fixed) in product costs, unlike variable costing.
- Identify reason 1: Complies with GAAP/IFRS for external financial statements, requiring inventory to absorb fixed overhead.
- Identify reason 2: Provides complete product cost for pricing and profitability analysis.
- Confirm reason 3: Ensures accurate inventory valuation on balance sheets by capitalizing fixed costs.
Why A is correct:
- A includes all three valid reasons, as absorption costing is mandated by accounting standards (e.g., GAAP) for full cost reporting and supports internal decisions.
Why the others are wrong:
- B omits reason 3, ignoring inventory valuation benefits.
- C omits reason 2, neglecting pricing applications.
- D omits reason 1, overlooking regulatory compliance.
Final answer: A
Topic: Traditional costing methods
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