Final answer:
Activity-based costing assigns costs to products by multiplying the cost driver rate by the number of cost driver units consumed by the product.
Step-by-step explanation:
In activity-based costing, costs are assigned to products by multiplying the cost driver rate by the number of cost driver units consumed by the product. The cost driver is the factor that causes or influences the cost, such as machine hours, direct labor hours, or number of setups. By using activity-based costing, companies can more accurately allocate costs to products, as each product consumes different amounts of cost drivers.
For example, let's say a company manufactures two products: A and B. The cost driver for product A is machine hours, and the cost driver for product B is direct labor hours. If product A requires 10 machine hours and product B requires 5 direct labor hours, the cost driver units for product A would be 10 machine hours, and for product B, it would be 5 direct labor hours.
To calculate the cost assigned to each product, we would multiply the cost driver rate (which is the predetermined overhead rate per unit of the cost driver) by the number of cost driver units consumed. This provides a more accurate and detailed understanding of the costs associated with each product.