Which statement about overhead absorption is NOT true?

Which statement about overhead absorption is NOT true?

• A. It assigns overhead costs to the cost unit produced by the cost centre
• B. It uses a rate based on budgeted activity
• C. It involves only variable costs
• D. It can use fixed and variable components

Answer: (C)

Overhead absorption is the process of charging overhead costs to the cost units produced, using a rate that links overhead to activity. This rate is usually set based on budgeted activity, so overheads are spread across units in a way that mirrors resource usage. It is not limited to variable costs—the fixed portion of overhead is absorbed as well, which is why including fixed and variable components is a valid approach. Therefore, the statement that overhead absorption involves only variable costs is not true. For example, if total overhead includes a fixed part and a variable part, the fixed portion is allocated to products just like the variable portion, ensuring full absorption of overhead into product costs.

Overhead absorption is the process of charging overhead costs to the cost units produced, using a rate that links overhead to activity. This rate is usually set based on budgeted activity, so overheads are spread across units in a way that mirrors resource usage. It is not limited to variable costs—the fixed portion of overhead is absorbed as well, which is why including fixed and variable components is a valid approach. Therefore, the statement that overhead absorption involves only variable costs is not true. For example, if total overhead includes a fixed part and a variable part, the fixed portion is allocated to products just like the variable portion, ensuring full absorption of overhead into product costs.