Which statement best describes activity-based costing (ABC)?

Which statement best describes activity-based costing (ABC)?

• A. A method of allocating costs based on machine hours.
• B. A budgeting technique using incremental budgets.
• C. An approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs.
• D. A pricing technique based on demand.

Answer: (C)

Activity-based costing looks at the activities that drive costs and assigns costs based on actual use of those activities, rather than spreading overhead by a single driver like machine hours. You identify the activities involved in making products or delivering a service, accumulate their total costs into activity cost pools, choose cost drivers that cause those costs, and then apply an activity rate to how much of each driver each product uses. By summing the costs from all activities, you get the total product cost. This approach gives more accurate overhead allocations when different products consume activities at different intensities, and it helps with analyzing profitability and identifying process improvements. Allocating costs by machine hours is a more traditional, single-driver method; budgeting by incremental budgets is about planning amounts, not tracing costs; pricing based on demand is about setting price, not how costs are traced to products.

Activity-based costing looks at the activities that drive costs and assigns costs based on actual use of those activities, rather than spreading overhead by a single driver like machine hours. You identify the activities involved in making products or delivering a service, accumulate their total costs into activity cost pools, choose cost drivers that cause those costs, and then apply an activity rate to how much of each driver each product uses. By summing the costs from all activities, you get the total product cost. This approach gives more accurate overhead allocations when different products consume activities at different intensities, and it helps with analyzing profitability and identifying process improvements.

Allocating costs by machine hours is a more traditional, single-driver method; budgeting by incremental budgets is about planning amounts, not tracing costs; pricing based on demand is about setting price, not how costs are traced to products.