Overhead is allocated to each product based on the estimated predetermined overhead rate and the number of units in the selected activity base An activity base is selected to allocate overhead.

This is traditionally direct labor hours, direct labor cost, or machine hours A predetermined overhead rate is calculated by dividing the estimated overhead by the allocation base

absorption costing — (also, full costing) system of accounting where all costs are treated as product costs regardless of whether they are variable or fixed. cost driver — activity that is the reason for the increase or decrease of another cost; examples include labor hours incurred, labor costs paid, amounts of materials used in production, units…. activity base — activity that has been considered to be a primary driver of overhead costs and for which, traditionally, direct labor hours or machine hours were used. direct labor — labor directly related to the manufacturing of the product or the production of a service.