Advantages, Disadvantages and Limitations of
Activity Based Costing (ABC) System:
Advantages of Activity Based Costing System:
costing system has the following main advantages /
- More accurate
costing of products/services, customers, SKUs,
- Easier to
understand for everyone.
- Utilizes unit
cost rather than just total cost.
well with Six Sigma and other continuous
- Makes visible
waste and non-value added activities.
performance management and scorecards.
costing of processes, supply chains, and value
- Activity Based
Costing mirrors way work is done
Disadvantages or Limitations of Activity Based
Activity based costing system help managers manage
overhead and understand profitability of products
and customers and therefore is a powerful tool for
decision making. However activity based costing has
a number of limitations or disadvantages.
These limitations or disadvantages are briefly
Implementing an ABC system is a major project
that requires substantial resources. Once
implemented an activity based costing system
is costly to maintain. Data concerning numerous
activity measures must be collected , checked
and entered into the system.
ABC produces numbers such as product margins,
that are odds with the numbers produced by
traditional costing systems. But managers are
accustomed to using traditional costing systems
to run theirs operations and traditional costing
systems are often used in performance
Activity based costing data can be easily
misinterpreted and must be used with care when
used in making decisions. Costs assigned to
products, customers and other cost objects are
only potentially relevant. Before making any
significant decision using activity based
costing data, managers must identify which costs
are really relevant for the decisions at hand.
Reports generated by this systems do not conform
to generally accepted accounting principles
(GAAP). Consequently, an organization involved
in activity based costing should have two cost
systems - one for internal use and one for
preparing external reports.