Activity-Based Costing (ABC) is a costing methodology that assigns overhead and indirect costs to specific products, services, or customers based on the activities that drive those costs. Unlike traditional costing systems (which often allocate overhead using a single, volume-based metric like direct labor hours or machine hours), ABC recognizes that many overhead costs are not proportional to production volume. It traces costs more accurately by focusing on the causes of cost incurrence—the activities. Core Definition In simple terms, ABC answers the question: "What activities are consuming our resources, and how much should each product or customer be charged for using those activities?"