Certified Specialist Business Intelligence Practice Test

Which of the following best defines activity-based costing (ABC)?

1. A method for tracking employee hours

2. A framework to understand resource allocation

3. A technique to allocate costs based on activities

4. A strategy for maximizing production speed

The correct answer is: A technique to allocate costs based on activities

Activity-based costing (ABC) is best defined as a technique to allocate costs based on activities. This approach focuses on assigning costs to specific activities within an organization and then using that information to better understand the true cost of products or services. ABC recognizes that not all costs are directly related to the production of a single item and that overhead costs should be allocated based on the actual activities used in the production process. By analyzing activities, organizations can identify which tasks consume resources and how these activities contribute to the overall cost structure. This detailed understanding allows businesses to make informed decisions about pricing, budgeting, and operational efficiencies, ultimately leading to improved financial performance. The other options do not fully capture the essence of ABC. Tracking employee hours primarily pertains to labor management, while understanding resource allocation addresses broader financial planning without the specificity of activity costs. Meanwhile, maximizing production speed focuses on efficiency and output rather than the allocation of costs associated with specific activities.