Final answer:
2) turn indirect costs into direct costs by tracking the cost drivers behind indirect costs. Activity Based Costing (ABC) aims to correct distortions in product costing by allocating indirect costs more accurately based on cost drivers and actual resource consumption patterns, which ultimately leads to more accurate product costing.
Step-by-step explanation:
Activity Based Costing (ABC) attempts to correct the distortions built into product costing by the way that indirect costs are allocated. The goal of ABC is to provide a more accurate method of costing by tracing the costs that directly relate to activities required to produce a product or a service. In particular, option 2 in the question you asked is the correct one, which states that ABC aims to turn indirect costs into direct costs by tracking the cost drivers behind indirect costs. The rationale is that traditional costing methods may allocate indirect costs based on simplified allocation bases (such as machine hours or labor time) rather than actual resource consumption patterns. By focusing on cost drivers and the activities that cause costs, ABC seeks to allocate costs based on the actual engagement of resources by different products or services, thereby leading to more accurate product costing.
Distinguishing between fixed cost, variable cost, average total cost, and marginal cost provides different insights, which are important when calculating per-unit costs. The average total cost reflects the sum of the average fixed costs and average variable costs. Marginal cost shows the change in total cost when producing one additional unit. Knowing these costs helps businesses price their products appropriately and make informed production decisions. However, if these costs are not attributed correctly, firms may have a distorted view of their product costs, which is what ABC aims to remedy.