In activity-based costing, how are costs assigned to a product?

In activity-based costing (ABC), costs are assigned to a product through the activities that are directly involved in producing it. This approach acknowledges that a product's costs are not solely linked to volume-based measures but are instead a result of various activities that consume resources.

Under ABC, activities such as machining, assembling, and quality control are analyzed, and costs are traced to these activities based on their actual consumption of resources. For example, if a specific product requires more machine hours or inspections than another, the costs associated with these activities will be allocated accordingly.

This method provides a more accurate representation of the costs associated with each product, which helps in strategic decision-making regarding pricing, product variety, and process improvements. By focusing on the actual activities that drive costs, businesses can identify areas for efficiency improvements and better understand profitability on a per-product basis.