What is a primary benefit of adopting activity-based costing?

Activity-based costing (ABC) provides a more accurate allocation of overhead costs based on the actual activities that incur those costs, which leads to a primary benefit that reflects how different products utilize resources in varied ways. By acknowledging that products make diverse demands on resources due to operational differences, ABC recognizes that not all products consume overhead in the same manner.

This approach allows businesses to identify cost drivers, understand how various activities contribute to costs, and determine the profitability of each product accurately. By recognizing the complexity and variation in resource usage, firms can make informed pricing, product mix, and process improvement decisions.

In contrast, combining all indirect costs into a single cost pool oversimplifies the allocation process and can lead to inaccurate product costing. Focusing solely on output unit-level costs ignores the broader view of overhead costs associated with different activities. Lastly, while efficient manufacturing and marketing can lead to high profits, this benefit is a result of effective costing rather than the primary reason for adopting activity-based costing.