In absorption costing inventory is valued at what?

In absorption costing inventory is valued at what?

• A. Variable costs only
• B. Direct costs only
• C. Total costs including selling and admin
• D. Full production cost

Answer: (D)

Under absorption costing, every cost that is incurred to produce a product becomes part of its value in inventory. This means both variable manufacturing costs and fixed manufacturing overhead are allocated to units, so inventory is valued at the full production cost. Treating only variable costs corresponds to variable costing, which excludes fixed overhead from inventory. Including only direct costs would ignore the manufacturing overheads that form part of production cost, and including selling and administrative costs would wrongfully treat period costs as product costs. Therefore, inventory is valued at the full production cost.

Under absorption costing, every cost that is incurred to produce a product becomes part of its value in inventory. This means both variable manufacturing costs and fixed manufacturing overhead are allocated to units, so inventory is valued at the full production cost. Treating only variable costs corresponds to variable costing, which excludes fixed overhead from inventory. Including only direct costs would ignore the manufacturing overheads that form part of production cost, and including selling and administrative costs would wrongfully treat period costs as product costs. Therefore, inventory is valued at the full production cost.