Which costing method allocates costs based on activities?

Activity-based costing (ABC) is the correct response as it specifically focuses on allocating costs to products or services based on the activities they require. Under this method, costs are traced to activities, and then those activity costs are assigned to products based on their actual usage of each activity. This allows for a more accurate reflection of the true costs of production, as it takes into account the varying demands that different products or services place on organizational resources.

The essence of ABC lies in recognizing that not all overhead costs are driven by the volume of production alone; instead, many costs are influenced by specific activities such as setups, material handling, and inspection processes. This makes ABC particularly useful in complex environments where traditional costing methods might misrepresent costs by averaging them across similar outputs.

In contrast, job order costing and process costing apply different principles based on either individual jobs or continuous processes, focusing more on the flow of costs rather than the underlying activities that generate those costs. Standard costing revolves around predetermined costs rather than the actual activities that drive costs. Therefore, ABC is distinct in its approach to linking costs explicitly to activities, enabling better decision-making and enhanced cost management.