ACCA Performance Management (F5) Certification Practice Exam

Which is a disadvantage of Activity-Based Costing?

1. Offers extremely low cost of implementation

2. More complex than traditional costing methods

3. Always provides accurate cost allocation

4. Requires simple data collection

The correct answer is: More complex than traditional costing methods

Activity-Based Costing (ABC) is a method that allocates indirect costs to products and services based on the activities that generate those costs. While it offers more precise costing compared to traditional methods, one notable disadvantage is its complexity. ABC involves identifying various activities within an organization, assigning costs to these activities, and then linking them to products or services based on how much of each activity is consumed. This level of detail necessitates significant data collection and analysis, making the implementation process more involved. Moreover, because it requires a finer granularity of data and a deeper understanding of the cost drivers associated with various processes, ABC can be resource-intensive and time-consuming compared to standard costing techniques. Consequently, while the accuracy of cost allocation is potentially improved, the trade-off is that it becomes a more complex system requiring careful management and continuous oversight. In contrast, some other options indicate characteristics that do not correspond well with ABC’s inherent nature. For instance, it does not offer low-cost implementation or simple data collection, since these facets are integral to the traditional costing method rather than ABC. Claims suggesting that ABC always provides accurate cost allocation also overlook that while it improves accuracy, it may still be affected by the quality of the data utilized and how well activities are