What distinguishes activity-based costing from traditional costing in terms of cost drivers?

What distinguishes activity-based costing from traditional costing in terms of cost drivers?

• A. It uses multiple cost drivers tied to activities rather than a single driver.
• B. It allocates overhead solely on direct labor hours.
• C. It ignores activity levels and allocates overhead evenly.
• D. It uses machine hours as the only driver.

Answer: (A)

Activity-based costing is defined by using multiple cost drivers linked to different activities to allocate overhead, rather than relying on a single volume-based driver. Traditional costing typically spreads overhead using one driver—often direct labor hours or machine hours—assuming overhead varies mainly with output. ABC, instead, identifies the various activities that consume resources (such as setups, inspections, or material handling) and assigns overhead to products based on how much each product uses those activities, using different drivers for different activities. This approach explains why different products incur different amounts of overhead. So, the key distinction is the use of several activity-related cost drivers rather than a single driver. The other descriptions describe traditional single-driver allocation or ignoring activity levels, which ABC does not do.

Activity-based costing is defined by using multiple cost drivers linked to different activities to allocate overhead, rather than relying on a single volume-based driver. Traditional costing typically spreads overhead using one driver—often direct labor hours or machine hours—assuming overhead varies mainly with output. ABC, instead, identifies the various activities that consume resources (such as setups, inspections, or material handling) and assigns overhead to products based on how much each product uses those activities, using different drivers for different activities. This approach explains why different products incur different amounts of overhead.

So, the key distinction is the use of several activity-related cost drivers rather than a single driver. The other descriptions describe traditional single-driver allocation or ignoring activity levels, which ABC does not do.