Absorption Costing Matches Costs to Revenues

Steps:

• Recall absorption costing assigns all manufacturing costs (fixed and variable) to units produced.
• Evaluate option A: Absorption aids inventory valuation but not primarily budgets.
• Evaluate option B: It allocates fixed overheads to match costs with related revenues.
• Evaluate options C and D: Absorption includes fixed costs per unit, affecting decisions and varying with output.

Why B is correct:

• Absorption costing follows the matching/accruals concept by allocating fixed manufacturing overheads to inventory, ensuring costs are expensed when revenues are recognized, per accounting standards like IAS 2.

Why the others are wrong:

• A: Budgets use flexible methods like marginal costing; absorption is for financial reporting.
• C: Marginal/variable costing is superior for decisions as it separates fixed/variable costs for contribution analysis.
• D: Fixed overhead absorption rate changes with output volume, altering unit costs short-term.

Final answer: B