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ACCA Applied Knowledge · Management Accounting · Alternative cost accounting principles

Which of the following is a recognised criticism or limitation of activity based costing?

ABC is costly and time-consuming to implement, and some overheads, such as facility-sustaining costs, have no real driver and still need arbitrary apportionment. It works in service firms and does not necessarily lower product costs; it just reallocates overhead more accurately.

  1. AIt cannot be used in service organisations
  2. BIt ignores the fact that overheads vary with activities
  3. CIt can be costly to implement and some overheads still need arbitrary apportionmentCorrect
  4. DIt always results in lower product costs than absorption costing

Explanation

ABC requires detailed analysis of activities and drivers, which is costly and time-consuming, and some costs (such as facility-sustaining costs) still have no clear driver and must be apportioned arbitrarily. ABC can be used in services, and it recognises that overheads vary with activities. It does not always lower costs; it reallocates them.

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