Question

A frequently cited limitation of activity-based costing is:

(a)ABC results in more cost pools being used to assign overhead costs to products.
(b)certain overhead costs remain to be allocated by means of some arbitrary volume-based cost driver such as labor or machine hours.
(c)ABC leads to poorer management decisions.
(d)ABC results in less control over overhead costs.

Answer 1

The limitation of activity-based costing is that certain overhead costs still need to be allocated by arbitrary volume-based cost drivers like labor or machine hours, despite ABC's aim to allocate costs more accurately.

Step-by-step explanation:

The frequently cited limitation of activity-based costing (ABC) is (b) certain overhead costs remain to be allocated by means of some arbitrary volume-based cost driver such as labor or machine hours.

ABC tries to allocate overhead costs more accurately to products based on their actual use of overhead activities. However, one of the challenges is that despite the more refined approach of ABC,

certain overhead costs still require allocation using less precise drivers, such as labor or machine hours, which can be arbitrary and may not reflect the true cost causing activities.

Understanding the insights offered by various measures of costs, like fixed cost, marginal cost, average total cost, and average variable cost, helps in evaluating the effectiveness of cost allocation methods like ABC.

Examining costs on a per-unit basis through these measures provides more detailed information and can guide more effective management decisions and cost control.