What is the primary focus of activity-based costing?

The primary focus of activity-based costing (ABC) is to allocate indirect costs based on activity drivers. This method provides a more accurate reflection of the costs associated with specific activities in the production process. By identifying and analyzing the activities that incur costs, organizations can assign those costs to products or services in a way that truly reflects the resources consumed.

Activity-based costing moves beyond traditional costing methods that may allocate indirect costs arbitrarily, such as by using a blanket overhead rate. Instead, it links costs to the actual activities that generate them, allowing for better insights into the cost structure. This detailed understanding can lead to improved decision-making regarding pricing, process improvements, and identification of costly activities that may be streamlined or eliminated.

Focusing on direct labor costs, fixed costs, or calculating production efficiency, while important in their respective contexts, does not capture the comprehensive view of cost allocation that ABC emphasizes. The strength of ABC lies in its ability to highlight how varied activities contribute to overall costs, helping managers make informed decisions that align with the organization's financial and operational goals.