Activity-based costing (ABC) is a costing method that assigns indirect costs to products and services based on the activities that are associated with them. In other words, ABC identifies the cost of each activity involved in the production of a product or service and then assigns those costs to the product or service based on the amount of each activity used.

The main purpose of ABC is to more accurately assign indirect costs, which are often overlooked under traditional costing methods. This can give managers a better understanding of the true cost of their products and services, and help them make more informed decisions about pricing, production, and resource allocation.

ABC is particularly useful in industries where there is a lot of variation in the types of products and services produced, or where there are many different steps involved in the production process. This is because ABC can provide a more detailed and accurate picture of the true cost of each product or service.

Despite its benefits, ABC can be complex and time-consuming to implement, and it may not be suitable for all businesses. Therefore, it’s important to weigh the pros and cons of ABC before deciding whether or not to adopt this costing method.