Disadvantages of ABC Costing

Disadvantages of ABC Costing

Disadvantages of activity based costing may be explained in terms of complexity, cost driver identification & selection, all cost coverage, and number of activities;

1.    Complex System

First disadvantage of ABC costing is its complexity. Activity based costing is a complex system of identification of activities and cost drivers and require extensive business experience and deep understanding of the business.

2.     Cost Driver Identification & Selection

Activity based costing implementation requires technical knowledge and extensive business experience. A number of factors are to be considered while deciding the appropriate cost driver. There may be more than cost driver for single activity, which may further complicate the selection of cost driver.

3.    Extension of absorption costing

Activity bases costing are just a complex extension of absorption costing and basic technique of absorption rate is still applicable in the activity based costing. There is more than one absorption rate in activity based costing as compared to single absorption rate in absorption costing.

4.    All Costs Coverage

In activity based costing, Identification of activities to cover all cost is difficult process. There are number of single costs in the organization. For example factory rent, and therefore identification & selection of activities of all those single costs are neither practical nor rational.

5.    Activities Number

In activity based costing, how many activities will cover the cost is difficult task. Too many activities will complex the absorption process, while too little number will not cover all the cost. A lot of experience and working is required to determine the exact number of activities.