How does activity-based costing differ from traditional costing methods? Question 1Answer a. Activity-based costing allocates all costs directly to products. b. Activity-based costing allocates indirect costs based on activities and cost drivers. c. Traditional costing focuses only on variable costs. d. Traditional costing ignores fixed costs.
The correct answer is:
b. Activity-based costing allocates indirect costs based on activities and cost drivers.
Activity-based costing (ABC) differs from traditional costing methods primarily in how it allocates indirect costs. ABC assigns costs to products based on the activities required to produce them and the resources consumed by those activities, using cost drivers to determine the allocation. In contrast, traditional costing often allocates indirect costs based on a single volume measure, such as direct labor hours or machine hours, which may not accurately reflect the actual consumption of resources.