Activity-based costing (ABC) assigns overhead costs based on what criteria?

Activity-based costing (ABC) assigns overhead costs based on the activities that drive those costs. This approach allows for a more accurate allocation of overhead expenses because it links costs directly to the specific activities that generate them, rather than applying a uniform rate based on broader metrics like production volume or facility size.

In ABC, costs are assigned to different activities (such as machine setup, quality control, or customer service), and these activities are then linked to the products or services that consume them. By focusing on the causes of overhead costs, ABC provides a clearer picture of what drives profitability and allows for more informed decision-making regarding pricing, budgeting, and process improvement.

This method contrasts with traditional costing systems, which may simply allocate costs based on estimated production volume, potentially distorting the true cost of individual products. By using ABC, organizations can identify areas where they can reduce costs, improve efficiency, and enhance their overall financial performance.