In activity-based absorption costing, which of the following is used to assign overhead costs to products?

• A. Direct labor hours only
• B. Estimated sales volume
• C. A single plant-wide overhead rate
• D. Cost drivers based on activities performed

Answer: (D)

Verified step by step guidance

1. Understand the concept of activity-based absorption costing: This method allocates overhead costs to products based on the activities required to produce them, rather than using a single plant-wide rate or direct labor hours.
2. Recognize the role of cost drivers: Cost drivers are factors that cause overhead costs to be incurred. Examples include machine hours, number of setups, or inspection hours, depending on the activities performed.
3. Identify why direct labor hours or a single plant-wide overhead rate are insufficient: These traditional methods may not accurately reflect the actual consumption of resources by different products, especially in complex manufacturing environments.
4. Learn how cost drivers are determined: Analyze the activities performed during production and identify measurable factors (cost drivers) that correlate with the overhead costs incurred for each activity.
5. Understand the assignment process: Overhead costs are assigned to products based on the extent to which each product uses the identified cost drivers, ensuring a more accurate allocation of costs.