Final answer:
The basis of the activity-based costing method is a cost driver, which is an activity or factor causing costs to be incurred. This method provides a more accurate and detailed picture of how costs are incurred compared to traditional costing methods.
Step-by-step explanation:
The basis of the activity-based costing method is a cost driver.
A cost driver is an activity or factor that causes costs to be incurred in a business. It is used to allocate indirect costs to products or services. In activity-based costing, the focus is on identifying and measuring the cost drivers that directly result in the consumption of resources and the creation of costs. This method provides a more accurate and detailed picture of how costs are incurred compared to traditional costing methods.
For example, in a manufacturing company, the cost driver for a particular product could be the number of machine hours required for production. By measuring and allocating costs based on the machine hours consumed by each product, activity-based costing provides a better understanding of the actual cost of producing that product.