Absorption costing includes all manufacturing costs in cost of sales

Steps:

• Identify absorption costing as a method that treats all manufacturing costs—direct materials, direct labor, variable overheads, and fixed overheads—as product costs.
• Recognize that these product costs flow into inventory and then cost of sales upon sale.
• Distinguish from variable costing, which excludes fixed manufacturing overheads from product costs.
• Confirm that non-manufacturing costs (e.g., selling, administrative) are period costs, not included in cost of sales.

Why B is correct:

• Absorption costing allocates both variable manufacturing costs (1) and fixed manufacturing overheads (4) to units produced, per standard accounting definition (IAS 2 or GAAP).

Why the others are wrong:

• A: Excludes fixed overheads (4), which are essential in absorption costing.
• C: Includes non-manufacturing cost (2), treated as period expense, not product cost.
• D: Omits variable manufacturing costs (1), incomplete for full absorption.

Final answer: B