The steps to be followed are as follows: identify the major activities that give rise to overheads (e.g. machining; despatching of orders) determine what causes the cost of each activity the cost driver (e.g. machine hours; number ofdespatch orders) calculate the total cost for each activity the cost pool (e.g. total machining costs; total costs ofdespatch department) calculate an absorption rate for each cost driver calculate the total overhead