Final answer:
In Activity-Based Costing (ABC), various Manufacturing Overhead (MOH) activities use different cost drivers to determine allocation rates. Cost drivers are essential in reflecting the true consumption of resources by each activity. This approach improves cost understanding and decision-making in companies.
Step-by-step explanation:
In ABC, which stands for Activity-Based Costing, various MOH (Manufacturing Overhead) activities will use a different cost driver to arrive at the allocation rates. A cost driver is the factor that causes or 'drives' the cost of a particular activity.
For instance, the cost driver for the activity of machine setups might be the number of setups, while the cost driver for quality inspections might be the number of inspections performed. In ABC, it is crucial to accurately identify the cost drivers associated with each activity to ensure that overhead costs are allocated in a way that reflects the true consumption of resources.
Companies use this methodology to get a more accurate understanding of what drives their costs and where they are spending money, which in turn can lead to more informed decision-making. ABC is especially useful in complex environments where overhead costs are not directly correlated to the volume of production but are rather caused by a variety of activities that support production.