How does absorption costing differ from variable costing in terms of fixed manufacturing overhead and inventory valuation?

• A. Absorption costing assigns fixed manufacturing overhead to product costs; variable costing treats fixed overhead as period expense; affects inventory valuation and profitability analytics.
• B. Absorption costing assigns no fixed overhead to product costs.
• C. Variable costing assigns fixed overhead to inventory; absorption costing expense it immediately.
• D. Both methods treat fixed overhead identically in all circumstances.

Answer: (B)

Under absorption costing, fixed manufacturing overhead is allocated to each unit produced, so it becomes part of the product cost and sits in the inventory value on the balance sheet. Only when those units are sold does the fixed overhead move into cost of goods sold. Under variable costing, fixed manufacturing overhead is treated as a period expense and is not included in the product cost; inventory reflects only variable manufacturing costs, while the fixed overhead is expensed in the period incurred. This difference means inventory valuation is higher under absorption costing due to including fixed overhead, and profits can vary with production levels under absorption, while under variable costing profits align more directly with sales since fixed overhead is expensed regardless of inventory.