Fixed manufacturing costs are deferred to future periods under absorption costing as part of ___________?
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Answer: B. future period
Explanation
Absorption costing treats fixed manufacturing overhead as a product cost attached to units produced. When some units remain unsold at year-end, their attached fixed costs are deferred into future periods. These costs sit in ending inventory until the products are eventually sold. Under absorption costing, all manufacturing costs—both variable and fixed—are inventoried. This practice contrasts with variable costing, which expenses fixed manufacturing overhead immediately. Inventory valuation on the balance sheet thus includes a share of fixed factory overhead.
The choice between absorption and variable costing significantly impacts reported periodic net income. Deferring fixed costs can boost current operating income when production exceeds sales volume. Auditors and tax authorities typically require absorption costing for official financial statements. Present, yearly, and monthly periods describe general calendar timeframes rather than the specific inventory deferral mechanism. Fixed costs are capitalized into inventory assets rather than expensed in the present period. Thus, future period correctly identifies where deferred overhead is recognized.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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