If fixed costs are §200,000 and 20,000 units are produced, a unit’s fixed cost is §10. This is an example of:

If fixed costs are §200,000 and 20,000 units are produced, a unit’s fixed cost is §10. This is an example of:
A . variable costing.
B . activity-based costing (ABC).
C . absorption costing.
D . overhead costing.

View Answer

Answer: C

Explanation:

Absorption costing is a method of allocating all manufacturing costs to the units produced. It includes both fixed and variable costs in the calculation of the unit cost. In this example, the fixed cost per unit is §10, which is obtained by dividing the total fixed cost of §200,000 by the number of units produced (20,000). This fixed cost per unit is then added to the variable cost per unit to get the total unit cost under absorption costing. Variable costing, on the other hand, only assigns variable costs to the units produced and treats fixed costs as period costs. Activity-based costing (ABC) is a method of allocating overhead costs to products or services based on the activities they consume. Overhead costing is a general term that refers to any method of assigning overhead costs to products or services.

References:

CPIM Part 2 Learning System, Module 2: Demand Management, Section 2.4: Costing Methods and Cost Behavior

CPIM Part 2 Learning System, Module 3: Supply, Section 3.5: Cost Management