Final answer:
In an Activity-Based Costing (ABC) system, each activity has an associated cost driver, which is a factor relating to the cost of activities.
Step-by-step explanation:
In an Activity-Based Costing (ABC) two-stage cost system, each activity has an associated cost driver. A cost driver is a factor that causes or relates to the cost of certain activities within a company. For example, the cost driver for a machine setup activity might be the number of setups, while the cost driver for a material handling activity could be the number of material movements or the weight of the materials handled. By identifying the appropriate cost drivers, companies can assign costs to products more accurately based on the resources consumed by each product. This helps in making better-informed pricing, budgeting, and strategic decisions.