In absorption costing, what happens to fixed overhead?

In absorption costing, what happens to fixed overhead?

• A. It is allocated to units.
• B. It is expensed in period.
• C. It is not considered.
• D. It is allocated to selling expenses.

Answer: (A)

In absorption costing, fixed manufacturing overhead is treated as a product cost and allocated to units produced. This means the fixed overhead is spread across the units, so each unit carries a share of the fixed overhead in its cost. As a result, fixed overhead becomes part of the inventory on the balance sheet and is released to cost of goods sold only when the product is sold. It isn’t expensed in the period, nor is it allocated to selling expenses. For example, if total fixed overhead is 100,000 and 20,000 units are produced, each unit carries 5 of fixed overhead in its cost.

In absorption costing, fixed manufacturing overhead is treated as a product cost and allocated to units produced. This means the fixed overhead is spread across the units, so each unit carries a share of the fixed overhead in its cost. As a result, fixed overhead becomes part of the inventory on the balance sheet and is released to cost of goods sold only when the product is sold. It isn’t expensed in the period, nor is it allocated to selling expenses. For example, if total fixed overhead is 100,000 and 20,000 units are produced, each unit carries 5 of fixed overhead in its cost.