Absorption costing is a costing method that allocates all manufacturing costs (both variable and fixed) to the cost of a product. In this method, fixed manufacturing overhead costs are treated as indirect product costs because they are not directly traceable to a single unit of production but are still part of the total cost of producing goods.

Let’s analyze each option:

Option A: Direct, product costs.

Incorrect. Direct costs are costs that can be traced directly to a specific product, such as direct materials and direct labor. Fixed manufacturing overhead is not a direct cost because it is spread across all units produced.

Option B: Indirect product costs.

Correct. Fixed manufacturing overhead costs (such as rent, depreciation, and utilities for the production facility) are indirect costs because they support the entire production process rather than a specific product. However, under absorption costing, they are still treated as product costs and allocated to inventory.

IIA Reference: The IIA’s guidance on cost allocation states that absorption costing assigns all manufacturing costs (including fixed overhead) to products. (IIA Practice Guide: Cost and Profitability Analysis)

Option C: Direct period costs.

Incorrect. Period costs are expensed in the period they occur, while absorption costing treats fixed manufacturing overhead as part of inventory (product cost) until sold.

Option D: Indirect period costs.

Incorrect. Fixed manufacturing overhead is not expensed immediately as a period cost under absorption costing; it is capitalized into inventory and expensed as Cost of Goods Sold (COGS) when the product is sold.

Thus, the verified answer is B. Indirect product costs.