Question

Please give some specific explanation why "Activity Based Costing is not relevant and too difficult to implement in the service industry"？

Answer 1

ABC is the Method is used in volume related industry, however same is used in service industry also for pricing of the services offered. The Basis of the ABC is based on the specific cost drivers associated with the cost, if such cost is utilised then same shall be allocated to the product.

In Service industry the difficulties faced are:

- Difficult in allocation

- Inappropriate identification of Activity and Driver

- ABC more appropriate in Volume related work

- Not Appropriate if various projects handled at one time

If we understand and elaborate the above difficulties in faced in ABC method in service industry, gives the dimensions of its difficult in implementation itself.

If the Service provider is handling or providing various service project at a point of time, then it is very difficult to allocate the time utilised for particular service project. What will be the cost driver to be marked against particular projects, whether it will be Time, Usage of resources or any other factor showing the identification of Driver and Activity.