Question

The first ‘Real Life’ in ‘When should ABC be used?’ suggests that the adoption of activity-based costing in Australia and New Zealand has not been as high as one might expect. What limitations and other challenges to implementing activity-based costing may be impacting the adoption of activity-based costing?

Answer 1

Here are the major limitations & Challenges in adoption of Activity based costing model :

1. Accuracy of ABC relies on the data recording for time spent on each of major activities performed for every employee. This itself has its own time costs as employees spent quite a bit of time in analyzing the time apportionment for a specific workday

2. Once the time Apportionments are decided by each of the employee then they need to be frequently updated whenever there are any changes in the work routine ( And most of times there are changes in work routines for most employees).

Many employees are found to be reluctant to update the data for time Apportionments.

3. Employees ( more so senior level divisional heads) keep challenging the Cost apportionment percentages which are based on the cost drivers decided & time apportionment data .

4. On many occasions, there is no agreement on exact cost drivers for apportioning specific costs.

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This can be explained by following example.

Suppose In a  university there are some reception staff employed to answer student inquires . There are two type of inquires ; (1) inquires from new student enrollments (2) inquires from existing enrolled students.

Salaries of reception staff is a cost & to apportion those salaries using ABC following challenges can be faced :

a.At the end of each inquiry the reception staff needs to mark the inquiry in above two category types. If there is a mistake in marking the type its going to affect the accuracy of basic data

b. the reception staff should be able to figure out exact nature of equity . I.e.. what course the inquiry relates to ; Which department in university handles that course; what is the cost centre code of that department.

c. Even after recording all the details correctly, there will be difference of opinion as to what should be the cost driver . IN this case the cost driver can be Number of inquires handled in a day or it can be time ( in minutes) required for each inquiry .

The time spent to handle one inquiry is different from the other.

In the end suppose the Salary costs are to be apportioned between the Central marketing department & the different individual departments which teach the course ; then some departments will prefer the " time in minutes to solve inquiry " as the cost driver and some departments will prefer " number of inquires handled in a day " as the cost driver.

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5. There is always an element of internal politics. In a scenario where there are multiple business divisions , its possible that the divisional heads ( of which the costs are to apportioned) have the preferences as to which other division they want to favor & which other division they want to burden.

6. The team which implements the ABC model has to be unbiased & free from any pressure. It should be directly reporting to the CFO . But in reality the ABC implementation becomes the object of internal competitions & its used to target the internal opponents.

7. The definition of "Activity" keeps changing as the Business processed change. And it incurs even more costs to update the data with " newly added activities".

8. Its possible that Employees ( whose costs are to be apportioned) make errors in their daily routine & spend certain amount of time in correcting those errors. Now the time spent on error gets allocated towards the Activity & it increases the Cost of that particular activity ( Cost per unit of cost driver) . So higher proportions of cost absorption are recorded .

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