Which costing method assigns overhead costs based on the activities required?

Activity-based costing (ABC) is a method that assigns overhead costs based on the activities required to produce a product or provide a service. This approach recognizes that not all costs are driven by production volume alone; instead, costs can be intricately linked to specific activities that consume resources. By identifying and analyzing these activities, organizations can better understand the true cost of their products and services.

ABC allocates costs to products by first determining the activities necessary for production and then assigning costs based on the extent to which each product uses these activities. This method leads to more accurate costing, allows for better pricing strategies, and can help identify inefficiencies in processes. It contrasts with other costing methods that might allocate overhead based purely on machine hours or labor hours, which may not provide a clear picture of resource consumption.

In the context of the other options, standard costing primarily uses predetermined overhead rates based on estimated costs and activity levels, which may not reflect actual consumption closely. Process costing aggregates costs over large production runs, focusing more on the overall process than individual activity drivers. Marginal costing evaluates the variable costs incurred in production but does not consider the overhead costs allocated based on specific activities. Thus, ABC stands out as the most suitable method for assigning overhead costs based on activities