Limitations of Activity-Based Costing (ABC)
- Data-hungry & costly to implement – Needs detailed activity mapping, driver measures, and frequent updates.
- Complex to maintain – Many activities/drivers = ongoing data collection burden and system upkeep.
- Driver selection is judgmental – Picking “the right” cost drivers is subjective; wrong choices distort costs.
- Measurement errors – Time estimates, surveys, and logs can be inaccurate or gamed.
- Still some arbitrariness – Facility-/organization-level costs (e.g., HQ rent) often get allocated on broad bases.
- Static model in a dynamic environment – Processes, products, and tech change faster than the model gets refreshed.
- Not always worth it for small/low-complexity firms – Simpler absorption methods may be “good enough.”
- Can ignore unused capacity – Traditional ABC may spread idle capacity cost to products unless explicitly adjusted.
- Behavioral resistance – Managers/staff may push back (extra tracking; results challenge existing margins).
- Limited external reporting use – ABC isn’t required by GAAP/IFRS; you’ll still reconcile to financial statements.
- Cross-functional coordination needed – Requires buy-in from ops, finance, IT; silos hinder accuracy.
- Risk of over-precision – False sense of accuracy; very granular models can obscure big, actionable cost drivers.
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