Definition:
Activity-based costing (ABC) is an accounting method that identifies and assigns costs to overhead activities and then assigns those costs to products. An activity-based costing (ABC) system recognizes the relationship between costs, overhead activities, and manufactured products, and, through this relationship, it assigns indirect costs to products less arbitrarily than traditional methods.
Some costs are difficult to assign through this method of cost accounting. Indirect costs, such as management and office staff salaries, are sometimes difficult to assign to a product. For this reason, this method has found its niche in the manufacturing sector.
Further Reading:
Book: The Unified modeling Language user guide by Grady Booch, James Rumbaugh and Ivar Jacobson