Activity based costing focuses on the activities that cause costs to be incurred.

Question

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Activity-based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours. ABC recognizes that the special engineering, special testing, machine setups, and others are activities that cause costs—they cause the company to consume resources.

Activity Based Costing Focuses on the Activities That Cause Costs