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Limitations of Activiry Based Costing


It has been raised by critics that activity based costing has several serious defects.

(a) Some measure of cost allocation may be required at the cost pooling stage for items like rent, rates and building depreciation.

(b) Can a single cost driver describe the cost behavior of all items in its associated pool?

(c) Unless costs are caused by an activity that is measurable in quantitative terms and which can be related to production output, cost drivers will not be usable.

(d) ABC is sometimes introduced because it is fashionable, not because it will be used by management to provide meaningful product costs or extra information. If management is not going to use ABC information, an absorption costing system may be simpler to operate.

(e) The cost of implementing and maintaining an ABC system can exceed the benefits of improved accuracy.

(f) Implementing ABC is often problematic.

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