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CMA Intermediate · Management Accounting · Activity Based Costing

Which of the following is a recognised limitation of Activity Based Costing?

A recognised limitation of ABC is that it is costly and time-consuming to implement and maintain, since activities, cost pools and drivers must be identified and measured. It does not automatically reduce overheads, it does address non-volume costs, and it is useful in pricing decisions.

  1. AIt always reduces total overheads of the firm
  2. BIt can be costly and time-consuming to implement and maintain because activities and drivers must be identified and measuredCorrect
  3. CIt ignores non-volume-related overhead costs
  4. DIt cannot be used for pricing decisions

Explanation

ABC requires detailed identification of activities, cost pools and drivers, and data collection, so implementation and upkeep are expensive. It does not itself reduce overheads, it specifically recognises non-volume-related costs, and it is useful for pricing.

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