Which of the following is a disadvantage of ABC?

Which of the following is a disadvantage of ABC?

• A. Complex to explain, impossible to allocate all overhead costs to specific activities, limited benefit if overhead costs are a small proportion of overall cost
• B. Easy to implement
• C. Always precise
• D. No data requirements

Answer: (A)

ABC has drawbacks because it adds complexity and data requirements beyond traditional costing. Explaining how activities and cost drivers link to overheads can be hard for others to grasp, since the model involves many moving parts. In practice, it’s also difficult to allocate every overhead cost to a single activity—some costs are shared or not driven by a clear activity, so the allocation is imperfect. And even though ABC can be more accurate, the benefit depends on how large the overhead portion of total costs is; if overheads are a small part of overall costs, the extra effort to implement and maintain ABC may not be worthwhile. These points explain why this statement captures the main disadvantages. The other options imply ABC is easy to implement, always precise, or requires no data, which isn’t true.

ABC has drawbacks because it adds complexity and data requirements beyond traditional costing. Explaining how activities and cost drivers link to overheads can be hard for others to grasp, since the model involves many moving parts. In practice, it’s also difficult to allocate every overhead cost to a single activity—some costs are shared or not driven by a clear activity, so the allocation is imperfect. And even though ABC can be more accurate, the benefit depends on how large the overhead portion of total costs is; if overheads are a small part of overall costs, the extra effort to implement and maintain ABC may not be worthwhile. These points explain why this statement captures the main disadvantages. The other options imply ABC is easy to implement, always precise, or requires no data, which isn’t true.