when a factory machine requires periodic maintenance the maintenance cost is allocated to the products produced by the machine for example the cost driver selected is machinery hours after every 1 000 machine hours there is a maintenance expense of 500 therefore every machine hour results in a 50 cent 500 1 000 maintenance cost allocated to the product being manufactured based on the cost driver of machine hours 
using cost drivers simplifies the allocation of manufacturing overhead the correct allocation of manufacturing overhead is important to determine the true cost of a product internal management uses the cost of a product to determine the prices of the products they produce for this reason the selection of accurate cost drivers directly affects an entity s profitability and operations activity based costing abc is a more accurate way of allocating direct and indirect costs abc calculates the true cost of each product by identifying the amount of resources consumed by a business activity such as electricity or man hours special considerations subjectivity of cost driversmanagement selects cost drivers as the basis for manufacturing overhead allocation there are no industry standards stipulating or mandating cost driver selection company management selects cost drivers based on the variables of the expenses incurred during production 