An accounting technique that identifies the activities that a firm does, and then allocates indirect costs to products. An activity based costing (ABC) system finds the relationship between activities, costs and products, and by this relationship allots indirect costs to products less arbitrarily than conventional methods.
Some costs are hard to allocate by this method of cost accounting. Indirect costs, like management and office staff salaries are at times hard to assign to a given product produced. For this reason, this technique has found its position in the manufacturing sector.