Definition of Activity Based Costing

Activity Based Costing is a new approach or method of product costing. It assigns indirect cost to each product and service matching the actual consumption of each.
Indirect cost includes machine cost, labor cost, design time, material cost etc.
This method helps businesses estimate each cost element of the product according to its consumption and hence considerably fair cost value is estimated.
The alternate and somewhat old method is known is traditional costing method. In this method, total cost is divided on the number of products, without considering the consumption of resources. Hence that method was not accurate so the new method got invented.