WoodCraft might divide total overhead costs (rent, utilities, supervisors) by the total labor hours. If custom tables take 2 hours to make and chairs take 1 hour, the table gets assigned double the overhead. This seems fair, but it might be wrong.
Cost drivers vary depending on the industry and the specific "cost pool" (a grouping of individual costs) being analyzed: what is cost driver in accounting
Traditionally, businesses allocated overhead based on simple metrics like labor hours. However, modern managerial accounting—specifically —uses cost drivers to assign indirect costs more accurately to products or services. Cost drivers vary depending on the industry and
: Ensures high-volume products don't unfairly "subsidize" low-volume, complex products that consume more resources. By using the correct cost drivers, WoodCraft realizes
By using the correct cost drivers, WoodCraft realizes that their custom tables are actually consuming a massive amount of overhead resources compared to chairs. They might discover that their "standard" pricing for tables is too low, leading to a loss on every custom table sold.