Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. This model assigns more indirect costs (overhead) to direct costs than conventional costing models. To implement ABC, an organization first identifies and classifies the activities involved in its production process. The costs associated with each activity, including indirect costs like overhead, are then determined. Next, cost drivers (bases that influence the cost level) are identified for each activity. These might be units produced, hours of labor, machine hours, or other measurable factors that drive the cost of the activity. Once costs and cost drivers are determined for each activity, you can calculate a cost per unit of cost driver. It becomes the basis for allocating activity costs to each product or service based on its usage of these activities. By doing so, ABC allows organizations to more accurately reflect the cost structure of their products and services, leading to more informed pricing and product mix decisions.