Limitations of Activity-Based Costing (ABC) System

The main limitations of ABC are:-

•  requires management to estimate costs of activity pools and to identify and measure cost drivers for these pools,

• detailed ABC systems are costly to operate and difficult to understand. Many companies are discouraged from using ABC due to the higher cost of identifying multiple activities and applying numerous cost drivers. ABC is more complex than traditional costing system. Also we need a team of dedicated people to develop and implement an ABC system,along with regular consultation with,and involvement of,relevant staff throughout the organization. In addition,the collation,processing,understanding and interpreting of the data also involves a lot of time and dedicated manpower.

• if the company is already using multiple absorption rates in each production centre. the potential for improved accuracy in product costs may be limited,

• the problems encountered by traditional methods remain like for example,many facilities costs ( rental,rates,insurance,heating and lighting) still needs to be apportioned to activities in the same way as traditional costing.This raisedthe question of whether to exclude this from ABC analysis.

• activity-cost rates also need to be updated regularly,

• Introduction and Benefits/Advantages of Activity-Based-Costing System (ABC)
• Steps In Implementing Activity-Based Costing System(ABC):
• What is Activity based budgeting and briefly describe how it could bring improvements to the budgeting process of an organization
• What is Activity-Based Costing System?
• Management Accounting Question ABC No2 On Activity Based Costing
• Activity Based Costing As a One Step Attribution System Compared To Other Traditional Systems
• Difference Between ABC system versus Traditional based costing system