Which of the following best defines 'activity-based costing'?

Activity-based costing (ABC) is a method that allocates costs to products or services based on the specific activities that go into their production. This approach recognizes that different products consume resources in varying amounts and ways, which allows for a more accurate reflection of the true costs of product manufacturing. By analyzing the activities involved—such as setup, production, and delivery—ABC assigns costs according to the actual usage of these resources.

This method contrasts with traditional costing methods that may allocate costs uniformly, potentially obscuring the true costs associated with specific products. As a result, activity-based costing provides businesses with more detailed insights into where resources are consumed, which can lead to better pricing strategies, cost management, and ultimately improved profitability. This tailored approach helps in identifying areas for cost efficiency and can drive informed decision-making in resource allocation.