Activity-Based Costing (ABC) allocates overhead to products based on what?

Activity-Based Costing (ABC) allocates overhead to products based on what?

• A. A single driver
• B. Activities that drive costs
• C. Direct labor hours only
• D. The total amount of overhead

Answer: (B)

Activity-Based Costing assigns overhead to products based on the activities that drive costs. It groups overhead into activity cost pools and uses a cost driver for each pool to measure how much of that activity each product uses. By applying a rate for each activity and multiplying by the product’s usage, overhead is allocated in proportion to actual resource consumption. This approach captures differences in how products consume activities like setups, inspections, or machine time, leading to more accurate product costs. Using a single driver, direct labor hours only, or simply the total overhead ignores which activities actually drive costs and how much each product uses them.

Activity-Based Costing assigns overhead to products based on the activities that drive costs. It groups overhead into activity cost pools and uses a cost driver for each pool to measure how much of that activity each product uses. By applying a rate for each activity and multiplying by the product’s usage, overhead is allocated in proportion to actual resource consumption. This approach captures differences in how products consume activities like setups, inspections, or machine time, leading to more accurate product costs. Using a single driver, direct labor hours only, or simply the total overhead ignores which activities actually drive costs and how much each product uses them.