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Some Of The Limitations/Constraints Of Activity-Based Costing

Earlier, we have describe the shortcomings of traditional costing systems but do you know that activity based costing like all other systems too has it limitations or constraints.

As managers, we need to at least understand some of the following limitations of ABC:-

  • 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

This entry was posted on Saturday, November 10th, 2007 at 2:53 am and is filed under 6.Activity Based Costing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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