Which statement describes absorption costing?

Which statement describes absorption costing?

• A. Overheads are allocated to departments.
• B. Overheads are apportioned between departments.
• C. Overheads are charged to cost units to be recovered.
• D. Overheads are ignored in product costing.

Answer: (C)

Absorption costing works by including overheads in the cost of each unit produced. Instead of treating overheads as a separate, period-only expense, they are charged to cost units (the products) using a predetermined rate based on a suitable driver (like machine hours or direct labor hours). This means the total overheads are recovered through the selling price as units are produced and sold, not left behind in departments. The other statements describe steps in handling overheads that occur before the final unit costing, such as allocating or apportioning them to departments. While those steps are part of some costing systems, absorption costing ultimately assigns the overheads to the cost units themselves. Saying overheads are ignored is simply incorrect because absorption costing relies on including overheads in product costs.

Absorption costing works by including overheads in the cost of each unit produced. Instead of treating overheads as a separate, period-only expense, they are charged to cost units (the products) using a predetermined rate based on a suitable driver (like machine hours or direct labor hours). This means the total overheads are recovered through the selling price as units are produced and sold, not left behind in departments.

The other statements describe steps in handling overheads that occur before the final unit costing, such as allocating or apportioning them to departments. While those steps are part of some costing systems, absorption costing ultimately assigns the overheads to the cost units themselves. Saying overheads are ignored is simply incorrect because absorption costing relies on including overheads in product costs.