Absorption Costing Allocates Fixed Manufacturing Costs to Products

Steps:

• Define absorption costing as a method that includes both variable and fixed manufacturing costs in product cost.
• Note that fixed costs are allocated to units produced, becoming part of inventory or cost of goods sold.
• Compare to variable costing, where fixed costs are expensed as period costs regardless of production.
• Match definition to choices: identify which accurately describes fixed cost treatment.

Why A is correct:

• Absorption costing allocates fixed manufacturing overhead to products based on production volume, so unsold units carry these costs in inventory, per standard cost accounting principles.

Why the others are wrong:

• B: Absorption costing often decreases income statement costs by deferring fixed costs in inventory when production exceeds sales.
• C: It increases closing inventory value by including fixed costs, unlike variable costing.
• D: Fixed costs are allocated during production, not solely when sold; sales trigger expensing from inventory.

Final answer: A