Question: What Are The Disadvantages Of Activity Based Costing?

Disadvantages of ABC:

  • ABC will be of limited benefit if the overhead costs are primarily volume related or if the overhead is a small proportion of the overall cost.
  • It is impossible to allocate all overhead costs to specific activities.
  • The choice of both activities and cost drivers might be inappropriate.

What are the advantages and disadvantages of Activity Based Costing?

Disadvantages of Activity-Based Costing

ABC produces more accurate costing of products by essentially converting broad indirect costs into direct costs of production. It determines the costs of the various sources of indirect costs and allocates these expenses to the specific activities that use them.

What are the limitations of Activity Based Costing?

Limitations of activity based costing are :

(a) Cost and Benefit: Some argues that, the cost of implementing and maintaining an Activity Based Costing system can exceed the benefits of improved accuracy. (b) If management is not thinking to use ABC information, an absorption costing system may be simpler to handle.

What are the advantages of Activity Based Costing?

Activity-based costing provides a more accurate method of product/service costing, leading to more accurate pricing decisions. It increases understanding of overheads and cost drivers; and makes costly and non-value adding activities more visible, allowing managers to reduce or eliminate them.

What is the biggest disadvantage of ABC?

A primary disadvantage of ABC is that it is not possible to divide some overhead costs such as the chief executive’s salary on a per-product usage basis.