4 limitation of activity-based costing

Activity-based costing is a method of allocating overhead cost by allocating it basing on the activities which drive it rather than using an arbitrary allocation base as in the traditional costing

The following are limitation of activity-based costing

  • Since activity-based costing trace fixed overhead cost to activity causing them, to do so need more data. More data means money to collect them and more time to analyze them. This is contrary to the traditional setting which allocates the overhead fixed-rate basing on a single base
  • There is a trade-off between expenses and accuracy when implementing activity-based costing. This is due to the fact that in order to get accurate data for implementing activity-based costing you need to spend more to obtain them but fewer data can lead to inaccurate information and vice versa
  • Activity-based costing need full support of top-level management, and support of activity-based performance review
  • ABC can lead to cases of overstated cost and understated margins and mistakes in pricing and other critical decisions

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