Final answer:
Activity Based Costing (ABC) is a method used by firms to allocate costs based on activities. Some firms are abandoning ABC due to complexity, limited variance analysis, difficulties in comparing products, but not due to its recognition of direct labor.
Step-by-step explanation:
Activity Based Costing (ABC) is a method used by firms to allocate costs to products or services based on the activities required to produce them. It provides a more accurate way to determine the true cost of a product or service compared to traditional costing methods. However, some firms are abandoning ABC due to several reasons:
- Complexity and time-consuming: ABC can be complex and time-consuming to implement and maintain. It requires the identification of various activities, their cost drivers, and the allocation of costs accordingly.
- Limited analysis of variances: ABC focuses on assigning costs based on activities rather than analyzing variances. This can make it less useful for variance analysis and cost control purposes.
- Difficulties in comparing different products: The financial nature of ABC reports can make it challenging to compare costs among different types of products. This limits its usefulness in making decisions related to product pricing and profitability.
- Less emphasis on direct labor: ABC recognizes that direct labor is just one component of total manufacturing costs. It takes into account other activities and cost drivers that contribute to the overall cost of producing a product. Therefore, the statement that ABC does not recognize the importance of direct labor as a component of total manufacturing cost is incorrect.