The Main Limitation of Activity-Based Costing is the Cost to implementation, Data requirements, Cost driver selection, monitoring and updates, difficulty in assigning an overhead cost, limited scope for a small organization, and decision-making for the non-financial manager, etc.
Activity-Based Costing difficult to assign costs to activities and measure the benefits of Activity-Based Costing. additionally time-consuming and costly to implement. if one's time implements ABC systems need to be updated and accurate cost allocation for data collection, data analysis, and adjustment to cost driver rates which is time-consuming and expensive. ABC requires detailed analysis and also measurement of various activities within an organization.
Activity-Based Costing identifies cost drivers and allocates the cost accordingly. This process will be done with intensive resources and required efforts and analysis of the necessary data. Furthermore, ABC does not always provide clear-cut solutions for decision-making. but it is the most accurate cost information compared to traditional costing. ABC does not provide a guarantee for optimal decisions. the manager has still needed to interpret and analyze the information data provided by ABC to make an effective decision. The complexity of Activity-Based Costing can also make it challenging for non-financial managers to make decisions, understand, and utilize the information effectively. Activity-Based Costing provides the most valuable information insight into cost allocation and helps identify areas for improvement and are suitable for different types of organizations.
Activity-Based Costing is expensive for investment in software training and expense between ongoing monitoring. ABC does not identify all relevant costs, especially that cost that are difficult to quantify and assign to specific activities. ABC overlook other important factors such as market dynamics, competition, and strategic consideration. ABC that the relationship between activities and cost is not always linear and consistent because the business may be a dynamic environment. ABC does not address non-financial factors which is an impact on decision making such as quality, customer satisfaction, and environmental sustainability.
Activity-Based Costing is difficult to use for budgeting and forecasting such to complexity, Time consumption, Lack of historical data, limited flexibility, etc. Budgeting and forecasting require consideration of external factors such as industry trends, market conditions, and macroeconomic variables. ABC cost is crucial for budgeting and forecasting. historical data not every time accurately reflect future activities and cost patterns. ABC involves a detailed analysis of activities such as cost drivers and cost allocation. Appropriate selecting cost drivers is allocating cost to activities which is involved in subjectivity. cost is most essentials factors for decision making and other non-financial such as market demand, customer satisfaction, and also strategic consideration play a significant role. ABC struggle to accurately measures and cost assigning to intangible factors such as customer service and employee training. The subjectivity of ABC is involved and allows for management bias and manipulation of cost allocation to achieve desired outcomes. some times ABC overemphasis activities support and allocate more cost to necessary leading to cost distortion. ABC is primarily a retrospective costing method, which is making it less effective in predicting future costs and estimating the impacts of changes in activity levels.
