Question

Which of the following is true of a company that uses absorption costing?

A. Net operating income fluctuates directly with changes in sales volume.
B. Fixed production and fixed selling costs are considered to be product costs.
C. Unit product costs can change as a result of changes in the number of units manufactured.
D. Variable selling expenses are included in product costs.

Answer 1

A company that uses absorption costing can have unit product costs that change with changes in the number of units manufactured because fixed production costs are spread over the total units produced.

Step-by-step explanation:

In absorption costing, one key characteristic is that fixed production costs are allocated to the products manufactured. This means that as the number of units produced changes, the unit product costs can also change because the total fixed costs are spread over the total units produced. Therefore, answer C is correct: Unit product costs can change as a result of changes in the number of units manufactured.

When using absorption costing, net operating income does not directly and solely fluctuate with changes in sales volume, as fixed costs absorbed into inventory may offset these fluctuations. Additionally, fixed selling costs are considered period costs and not product costs, so option B is inaccurate. Variable selling expenses are also considered period costs and not included in product costs, which means option D is not correct.