Under absorption costing, fixed production costs are included in inventory as part of product costs.

Under absorption costing, fixed production costs are included in inventory as part of product costs.

• A. Yes; fixed production costs are included in inventory as product costs
• B. No; fixed production costs are treated as period costs
• C. Only when production volume exceeds a threshold
• D. They are excluded from cost of sale

Answer: (A)

Under absorption costing, all manufacturing costs are attached to the product, so fixed production costs are allocated to units produced and carried in inventory. This means those fixed costs become part of the product's value on the balance sheet and are not expensed in the period they’re incurred. When goods are sold, the fixed production costs that were included in inventory flow into cost of goods sold along with the variable costs. This approach aligns the expense of production with the revenue from the goods sold. The other ideas don’t fit because fixed production costs are not treated as period costs under absorption costing, there’s no threshold that changes this treatment, and those costs do not stay excluded from cost of sale—they are included in inventory and later moved to cost of sales when sold.

Under absorption costing, all manufacturing costs are attached to the product, so fixed production costs are allocated to units produced and carried in inventory. This means those fixed costs become part of the product's value on the balance sheet and are not expensed in the period they’re incurred. When goods are sold, the fixed production costs that were included in inventory flow into cost of goods sold along with the variable costs. This approach aligns the expense of production with the revenue from the goods sold.

The other ideas don’t fit because fixed production costs are not treated as period costs under absorption costing, there’s no threshold that changes this treatment, and those costs do not stay excluded from cost of sale—they are included in inventory and later moved to cost of sales when sold.