Absorption cost is defined as?

Absorption cost is defined as?

• A. Full production cost
• B. Costs that are never allocated
• C. Only fixed costs
• D. Only variable costs

Answer: (A)

Absorption cost means allocating every production cost to the product, so the product includes direct materials, direct labor, and both fixed and variable manufacturing overhead. This is why it is described as the full production cost—every cost involved in making the product is absorbed into its cost. It differs from other ideas: not “costs that are never allocated,” since those aren’t assigned to the product; not “only fixed costs,” which would miss the variable portion; and not “only variable costs,” which would omit fixed overhead. In short, absorption cost is the complete production cost allocated to units produced.

Absorption cost means allocating every production cost to the product, so the product includes direct materials, direct labor, and both fixed and variable manufacturing overhead. This is why it is described as the full production cost—every cost involved in making the product is absorbed into its cost. It differs from other ideas: not “costs that are never allocated,” since those aren’t assigned to the product; not “only fixed costs,” which would miss the variable portion; and not “only variable costs,” which would omit fixed overhead. In short, absorption cost is the complete production cost allocated to units produced.