Final answer:
Activity based costing is often abandoned due to its complexity, the resource-intensive nature of its maintenance, difficulties in variance analysis, and a lower emphasis on direct labor costs.
Step-by-step explanation:
Firms may abandon activity based costing (ABC) for several reasons, despite ABC providing a detailed approach to understanding product and service costs. One reason is the complexity and time-consuming nature of implementing and maintaining the ABC system, which can be a significant drawback. ABC requires a detailed analysis of all activities and resources used, making it resource-intensive to operate.
Another reason firms may move away from ABC is because it can be difficult to use in variance analysis, which is essential for management to monitor performance against budgets. Furthermore, cost assignments in ABC are primarily financial, which might not lend itself well to comparing different product lines, especially if those product lines have different cost structures or require different activities.
Lastly, ABC can be criticized for not emphasizing direct labor costs, especially in environments where direct labor is a significant part of total costs. As manufacturing processes have become more automated and direct labor has constituted a smaller proportion of total costs, the benefits of a costing system that focuses on direct labor have diminished.