Which costing approach incorporates both direct and indirect costs based on activities?

The correct answer is activity-based costing. This approach focuses on identifying and analyzing activities within an organization and assigns costs to those activities based on their usage of resources. Unlike traditional costing methods, which may allocate indirect costs on a broad basis, activity-based costing recognizes that different activities consume resources at different rates and therefore need specific allocation methods.

By using this method, organizations can gain insights into the true costs associated with activities, products, or services. This can lead to more informed decision-making, as costs are linked more directly to the activities that drive them. This is particularly beneficial in complex environments where overhead costs may be significant and diverse across different products or services.

In contrast, standard costing typically relies on predetermined costs for direct materials and labor, but does not focus specifically on the underlying activities driving those costs. Target costing is a pricing strategy aimed at reducing cost to meet market conditions rather than analyzing cost allocations. Job-order costing assigns costs based on specific jobs or orders but does not directly address the activity-based methodology that provides more detailed cost insights.