Which two steps define Activity Based Costing?

Which two steps define Activity Based Costing?

• A. Uses ABC for budgeting only
• B. Allocates all costs equally
• C. Links indirect costs to activities; Allocates activity cost to jobs based on specific attributes
• D. Focuses on direct costs only

Answer: (C)

Activity Based Costing focuses on what actually drives overhead and how those drivers affect each job. It starts by turning indirect costs into groups called activity cost pools—essentially linking costs to the activities that cause them. Then it uses drivers that measure how much of each activity a product or job uses, and allocates the cost from each activity pool to the jobs based on that usage. So, the two defining steps are: first, link indirect costs to activities; second, allocate the costs from those activities to jobs according to how much each job consumes the activities (often using attributes like number of setups, hours of machining, or inspections). This approach gives a more accurate picture of product or job costs than spreading overhead evenly or focusing only on direct costs. In contrast, allocating all costs equally ignores the real drivers of overhead, and focusing only on direct costs misses the substantial indirect costs that ABC is designed to assign. If ABC were used only for budgeting, it would fail to provide the actionable cost detail needed for pricing and decision making.

Activity Based Costing focuses on what actually drives overhead and how those drivers affect each job. It starts by turning indirect costs into groups called activity cost pools—essentially linking costs to the activities that cause them. Then it uses drivers that measure how much of each activity a product or job uses, and allocates the cost from each activity pool to the jobs based on that usage.

So, the two defining steps are: first, link indirect costs to activities; second, allocate the costs from those activities to jobs according to how much each job consumes the activities (often using attributes like number of setups, hours of machining, or inspections). This approach gives a more accurate picture of product or job costs than spreading overhead evenly or focusing only on direct costs.

In contrast, allocating all costs equally ignores the real drivers of overhead, and focusing only on direct costs misses the substantial indirect costs that ABC is designed to assign. If ABC were used only for budgeting, it would fail to provide the actionable cost detail needed for pricing and decision making.