ECONOMICS

Detailed explanation-1: -Items included in inventory under absorption costing. The following items are included in the inventory cost using the absorption costing method: direct material, direct labor, variable overhead, and fixed overhead. Choice-letter “c” is the correct answer.

Detailed explanation-2: -Absorption costing allocates fixed overhead costs to a product whether or not it was sold in the period. This type of costing method means that more cost is included in the ending inventory, which is carried over into the next period as an asset on the balance sheet.

Detailed explanation-3: -The fundamental difference between the two systems is one of timing. The direct costing model takes all the fixed cost to the income statement immediately. The absorption costing model assigns the fixed cost to units produced during the period.

Detailed explanation-4: -Under absorption costing, fixed manufacturing overhead cost is not included in product cost. Under variable costing, product cost does not contain any fixed manufacturing overhead cost.

Detailed explanation-5: -Absorption costing is a costing system that is used in valuing inventory. It not only includes the cost of materials and labor, but also both variable and fixed manufacturing overhead costs.