Which statement about overhead absorption is true?

Which statement about overhead absorption is true?

• A. It does not involve the cost centre
• B. It is only used for variable overhead
• C. It assigns overhead to selling prices
• D. It is charging production overhead costs to the cost unit produced by the cost centre

Answer: (D)

Overhead absorption is the process of charging production overhead costs to the cost unit produced by a cost centre, using a predetermined rate based on a driving factor such as units produced, labour hours, or machine hours. This ensures that each unit carries a share of the overheads, so the cost of the product includes the production overhead. This statement is the best because it directly describes the core purpose of absorption: allocating production overheads to the actual units produced in a cost centre. It isn’t limited to variable overhead (it can include fixed overhead as well, depending on the method), and it doesn’t relate to selling prices—the focus is on assigning overheads to production costs and inventory. It also true that the overheads are handled within the cost centre to be absorbed into each produced unit, rather than bypassing the centre.

Overhead absorption is the process of charging production overhead costs to the cost unit produced by a cost centre, using a predetermined rate based on a driving factor such as units produced, labour hours, or machine hours. This ensures that each unit carries a share of the overheads, so the cost of the product includes the production overhead.

This statement is the best because it directly describes the core purpose of absorption: allocating production overheads to the actual units produced in a cost centre. It isn’t limited to variable overhead (it can include fixed overhead as well, depending on the method), and it doesn’t relate to selling prices—the focus is on assigning overheads to production costs and inventory. It also true that the overheads are handled within the cost centre to be absorbed into each produced unit, rather than bypassing the centre.