Which of the following statements is true regarding activity-based costing (ABC)?

Activity-Based Costing (ABC) is a cost allocation method that assigns overhead costs based on activities that drive costs rather than using a single volume-based measure like labor hours or machine hours. It provides a more accurate allocation of indirect costs to products or services.

ABC Costing and Its Flexibility (Correct Answer: C)

ABC can be applied to both job order costing (which tracks costs for individual products or projects) and process costing (which tracks costs across continuous production processes).

IIA Standard 2120 – Risk Management suggests that internal auditors evaluate whether cost allocation methodologies align with business objectives and financial accuracy.

ABC improves cost accuracy by assigning overhead to specific activities, making it useful in different costing systems.

Why the Other Options Are Incorrect:

A. "ABC is similar to conventional costing in how it treats overhead allocation." (Incorrect)

Traditional costing allocates overhead based on a single cost driver, such as direct labor or machine hours.

ABC allocates overhead based on multiple activity drivers, making it more precise.

B. "ABC uses a single unit-level basis to allocate overhead." (Incorrect)

ABC does not rely on a single unit-level measure.

Instead, it uses multiple cost drivers at different levels (unit-level, batch-level, product-level, and facility-level).

D. "The primary disadvantage of ABC is less accurate product costing." (Incorrect)

ABC is actually more accurate than traditional costing in assigning overhead costs.

The primary disadvantages of ABC are its complexity and cost of implementation, not reduced accuracy.

IIA Standard 2120 – Risk Management (Assessing the appropriateness of costing methodologies)

IIA Standard 2130 – Compliance (Ensuring financial management practices align with standards)

IIA Standard 2210 – Engagement Objectives (Evaluating financial controls and cost allocation methods)

Step-by-Step Justification:IIA References for This Answer:Thus, the best answer is C. An ABC costing system may be used with either a job order or a process cost accounting system, as ABC is flexible and can be applied in both costing environments.