Absorption costing (also called the full cost method) treats allcosts of production as product costs, regardless of whether theyare variable or fixed. Since no distinction is made betweenvariable and fixed costs, absorption costing is not well suited forCVP computations. Under absorption costing, the cost of a unit ofproduct consists of direct materials, direct labor, and bothvariable and fixed overhead. Variable and fixed selling andadministrative expenses are treated as period costs and arededucted from revenue as incurred.
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