Final answer:
Firms adopt Activity-Based Costing (ABC) to more accurately allocate costs to products, which helps in pricing, managing resources, and strategic decision-making. It provides detailed financial reports that facilitate variance analysis and cost comparisons across products. Option B is correct.
Step-by-step explanation:
Firms are adopting Activity-Based Costing (ABC) primarily because it more accurately allocates costs to products. This advanced approach to cost accounting recognizes the various activities that contribute to the production of each product or service and assigns costs to these activities on a more granular level. Compared to traditional costing methods, ABC helps in identifying the true costs associated with each product, allowing businesses to price their products or services more effectively and manage their resources more efficiently. By doing so, firms can facilitate the analysis of variances, recognize the importance of indirect costs, and make comparisons among different types of products due to the detailed financial nature of the reports.
Breaking down total costs into fixed cost, marginal cost, average total cost, and average variable cost is a fundamental practice for businesses to gain insight into their cost structures. This separation aids in understanding how costs change with the level of production and can influence pricing and production decisions in the long run. For firms, assigning costs accurately is crucial for determining the profit-maximizing quantity to produce and the optimal price to charge, which is why ABC can be a valuable tool in strategic decision-making within the market structure in which the firm operates.