Absorption Costing Focuses on Production Overheads

Steps:

• Define absorption costing: It assigns all manufacturing costs, including fixed and variable production overheads, to products.
• Identify overhead absorption rate: This rate allocates production overheads to units based on activity like labor hours or machine hours.
• Exclude non-production costs: Administrative and selling overheads are treated as period costs, not absorbed into inventory.
• Confirm for pricing: Selling prices under absorption costing recover absorbed production costs plus profit.

Why B is correct:

• Absorption costing requires the overhead absorption rate to include total production overheads (fixed and variable) to fully cost units, per standard accounting definitions.

Why the others are wrong:

• A: Administrative and selling overheads are period costs, not absorbed into products.
• C: Includes non-production costs and ignores fixed production overheads, which must be absorbed.
• D: Excludes fixed production overheads, leading to undercosting units.

Final answer: B