Which of the following is not a limitation of activity-based costing
A) Maintaining an activity-based costing system is more costly than maintaining a traditional direct labour-based costing system.
B) Changing from a traditional direct labour-based costing system to an activity-based costing system changes product margins and other key performance indicators used by managers. Such changes are often resisted by managers.
C) In practice, most managers insist on fully allocating all costs to products, customers, and other costing objects in an activity-based costing system. This results in overstated costs.
D) More accurate product costs may result in increasing the selling prices of some products.

Question

Quizplus · Accepted Answer

This statement is not a limitation of activity-based costing (ABC); rather, it is a potential consequence of implementing ABC. When a company adopts ABC, it gains a more accurate understanding of the costs associated with each product. This can lead to adjustments in pricing strategy, but it is not inherently a limitation of the system itself. The goal of ABC is to provide precise cost information to support management decisions, including pricing. If the accurate costing information suggests that a product has been underpriced, the company may decide to increase the selling price to better reflect the true cost of production and maintain profitability. However, this is a strategic decision based on more accurate information, not a limitation of the costing system.
The other options listed are indeed limitations or challenges associated with implementing and maintaining an ABC system:
A. Maintaining an activity-based costing system is more costly than maintaining a traditional direct labour-based costing system. This is true because ABC requires the collection and analysis of more data, which can be time-consuming and expensive.
B. Changing from a traditional direct labour-based costing system to an activity-based costing system changes product margins and other key performance indicators used by managers. Such changes are often resisted by managers. This is a limitation because it involves a change management challenge. Managers may be resistant to change due to the impact on the metrics they are used to.
C. In practice, most managers insist on fully allocating all costs to products, customers, and other costing objects in an activity-based costing system. This results in overstated costs. This can be a limitation because ABC aims to assign costs more accurately based on actual activities. If managers insist on full allocation rather than using more accurate cause-and-effect relationships, the benefits of ABC may be diminished.

Which of the Following Is Not a Limitation of Activity-Based