# Steps to Implement ABC
A five-step procedure is followed to apply Activity Based Costing in an organisation:
Step 1 — Identify the Activities to be performed in producing/servicing the product (e.g. setup, inspection, packaging, ordering, despatch).
Step 2 — Calculate Total Cost Pool for each activity by clubbing all costs incurred in performing that activity.
Step 3 — Identify the Cost Driver for each activity — i.e. the factor causing variation in that activity's cost.
Step 4 — Find Total Number of Cost Drivers consumed across all products / departments during the period.
Step 5 — Calculate the Recovery Rate for each activity:
$$\text{Recovery Rate} = \frac{\text{Cost Pool}}{\text{Total Cost Drivers}}$$
Finally, multiply the recovery rate by the cost drivers consumed by each product to get the activity cost chargeable to that product.
## Examples of Cost Drivers across Business Functions
| Business Function | Likely Cost Driver |
|---|---|
| Research & Development | No. of projects undertaken / Hours spent on projects |
| Designing Cost | No. of products designed / Hours spent on design |
| Customer Service | No. of customer calls / Hours spent on servicing |
| Marketing | No. of advertisements / No. of persons in marketing team |
| Production Setup | No. of setups |
| Material Procurement | No. of purchase orders |
| Quality Inspection | No. of inspections |
| Despatch | No. of despatches / Weight despatched |