Which of the following statements is true regarding activity-based costing (ABC)?
A) It is based on the concept that a single cost driver can drive all overhead costs.
B) It is based on the concept that activities drive overhead costs.
C) It is based on the concept that unit-level costs drive all overhead costs.
D) It is based on the concept that either the number of direct labor or machine hours incurred drives all overhead costs.

Question

Quizplus · Accepted Answer

Activity-based costing (ABC) is based on the concept that activities (including non-unit-level activities) drive overhead costs. It seeks to allocate overhead costs more accurately by identifying the specific activities that are responsible for causing overhead costs and then tracing these costs to particular products, services, or customers based on the amount of activity each uses. ABC addresses the limitations of traditional cost accounting, which often over or under allocates overhead costs because it assumes all overhead costs are caused by a single cost driver (such as direct labor hours) and ignores the fact that different products or services may consume overhead resources at different rates.

Which of the Following Statements Is True Regarding Activity-Based Costing