In ABC, after tracing costs to activities, what is the purpose of linking cost drivers to cost objects?

In ABC, after tracing costs to activities, what is the purpose of linking cost drivers to cost objects?

• A. To assign activity costs to final cost objects such as projects or products
• B. To compute taxes
• C. To determine selling price
• D. To simplify accounting

Answer: (A)

Linking cost drivers to cost objects in activity-based costing connects the activities that generate costs to the items that incur those costs. After costs are traced to activities, the drivers describe how much of each activity a cost object uses. By applying the activity’s cost to the cost object in proportion to its usage, you assign the activity costs to final cost objects such as projects or products. This produces a more accurate understanding of the true cost of each object, supporting better pricing, product mix, and profitability decisions. It isn’t primarily about tax calculation or simplifying accounting—its main purpose is accurate allocation of activity costs to the final cost objects.

Linking cost drivers to cost objects in activity-based costing connects the activities that generate costs to the items that incur those costs. After costs are traced to activities, the drivers describe how much of each activity a cost object uses. By applying the activity’s cost to the cost object in proportion to its usage, you assign the activity costs to final cost objects such as projects or products. This produces a more accurate understanding of the true cost of each object, supporting better pricing, product mix, and profitability decisions. It isn’t primarily about tax calculation or simplifying accounting—its main purpose is accurate allocation of activity costs to the final cost objects.