Question

Explain the concept and rationale of Activity Based Costing. What are the limitations of Activity Based Costing?

Answer 1

Explanation:

Allocation of overheads under Activity Based Costing According to Kalpan and Cooper, volume related cost drivers can not be used for allocating long term variable costs to products. The reason is that the long term variable costs are driven by the complexity and variety of business activities rather than by volume

Answer 2

Answer:

Activity-based costing is a costing method that has been developed to deal with the perceived weaknesses of traditional absorption costing.

Explanation:

The limitation of Activity Based Costing are as follow:

• Activity Based Costing will be of limited benefit if the overhead costs are primarily volume related or if the overhead is a small proportion of the overall cost.
• Difficult to identify the overall activities that influence costs.
• Not easy to select the most suitable cost drive.
• Difficult to evaluate cost on the basis of activities.
• Not suitable for small manufacturing concerns.
• Activity Based Costing be more complex to explain to the stakeholders of the costing exercise.