Which of the following costs/expenses is included in product costs under both absorption costing and variable costing?

Question

BlackTom AI · Accepted Answer

The question asks which costs are included in product costs under both absorption costing and variable costing.

Option: Variable manufacturing costs
- Under absorption costing, all manufacturing costs, including both variable and fixed manufacturing costs, are treated as product costs. This means variable manufacturing costs are included in inventory cost on the balance sheet and become cost of goods sold when the product is sold.
- Under variable costing, only the variable portion of manufacturing costs is treated as a product cost. Although fixed manufacturing costs are expensed as period costs, variable manufacturing costs still form part of the cost of the product.
- Therefore, variable manufacturing costs are included in product costs in both costing systems, satisfying the condition in the question.

Why this option is correct beyond the surface level: variable manufacturing costs are the portion of production costs that vary with output (materials, direct labor, and variable overhead). These are inseparable from the actual production volume and thus are embedded in the cost of inventory under both methods, aligning with the concept that product costs reflect resources consumed to create inventory.

Why other potentialcost categories (if listed) would not fit the prompt: fixed manufacturing costs are included as product costs only under absorption costing, not under variable costing. Non-manufacturing costs (selling, administrative) are not product costs under either method; they are period costs. Since the question focuses on a cost that appears in product costs under both methods, those categories would not satisfy the requirement and would be incorrect if they were presented as options.

In summary, variable manufacturing costs consistently form part of the product cost pool in both absorption and variable costing, which is why this option aligns with the prompt.

Which of the following costs/expenses is included in product costs under both absorption costing and variable costing?

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