Absorption Costing Is a Method of Allocating Cost to Inventories

question 11

Multiple Choice

Absorption costing is a method of allocating cost to inventories such that the cost of inventory includes:

• A) both variable and fixed costs, irrespective of the level of operating capacity.
• B) an appropriate share of both variable and fixed costs with fixed costs being allocated based on normal operating capacity.
• C) all costs other than fixed costs based on normal operating capacity.
• D) both variable and fixed costs, both of which are allocated based on normal operating capacity.

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Definitions:

Interest

The charge for the privilege of borrowing money, typically expressed as an annual percentage rate.

Risk Averse

The preference to avoid uncertainty and potential losses in decision-making, favoring safer options even if they offer lower potential returns.

Portfolio

A collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including closed-end funds and exchange traded funds.

Diversification

A risk management strategy that mixes a wide variety of investments within a portfolio to reduce exposure to any single asset or risk.