Absorption costing is a method of allocating cost to inventories such that the cost of inventory includes:
A) both variable and fixed costs, irrespective of the level of operating capacity.
B) an appropriate share of both variable and fixed costs with fixed costs being allocated based on normal operating capacity.
C) all costs other than fixed costs based on normal operating capacity.
D) both variable and fixed costs, both of which are allocated based on normal operating capacity.

Question

Quizplus · Accepted Answer

Absorption costing includes an appropriate share of both variable and fixed costs, but fixed costs are allocated based on normal operating capacity. This means that even if the actual production levels are lower or higher than normal operating capacity, the fixed costs are still allocated based on normal operating capacity.

Absorption Costing Is a Method of Allocating Cost to Inventories