Multiple Choice QuestionWhen using absorption costing when production is greater than sales, a portion of fixed overhead is allocated to:Multiple choice question.contribution marginexpensesending inventoryselling expenses
Question
Multiple Choice QuestionWhen using absorption costing when production is greater than sales, a portion of fixed overhead is allocated to:Multiple choice question.contribution marginexpensesending inventoryselling expenses
Solution
The correct answer is "ending inventory".
Here's why:
Absorption costing, also known as full costing, is a system that treats all production costs as product costs, regardless they are variable or fixed. This means that all manufacturing costs (direct materials, direct labor, and both variable and fixed manufacturing overhead) are included in the cost of the product.
When production exceeds sales, not all of the products produced are sold. The unsold units are stored in inventory. The costs of producing these unsold units (including a portion of the fixed overhead) are also stored in inventory as part of the product cost. They become expenses (cost of goods sold) in the period in which the product is sold.
Therefore, when using absorption costing and production is greater than sales, a portion of fixed overhead is allocated to ending inventory.
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