Final answer:
An ABC system is costlier to maintain than traditional costing systems due to its complexity in tracking multiple activities, the need for detailed data collection, and frequent updates for accuracy, as well as the requirement for specialized software and training.
Step-by-step explanation:
You are asking why an Activity-Based Costing (ABC) system is more costly to maintain than traditional costing systems. The primary reasons for this include the complexity of tracking and analyzing multiple activities and cost drivers, the need for more detailed data collection, and frequent updates to maintain accuracy. Costing systems in different industries, such as automotive, software, or fast food, require tailored approaches, which can add to the complexity and cost. With traditional systems, overhead costs are typically allocated based on a single measure, like machine hours, which is simpler but less precise. An ABC system, by contrast, requires the identification and tracking of multiple cost drivers for more accurate cost allocation, which leads to increased administrative efforts and costs.
Furthermore, the potential for communication issues and inefficiencies can grow as a company scales up, which can be exacerbated by a detailed system like ABC. These are called diseconomies of scale, where average costs rise as output increases, due to the complexity of the operation. ABC systems can also require specialized software and employee training, adding to the maintenance cost. Nonetheless, it provides a more accurate costing method, which can be essential for management decisions in more complex production environments, despite the higher maintenance costs.