Which statement about ABC disadvantages is true?

Which statement about ABC disadvantages is true?

• A. ABC always allocates all overhead to products
• B. ABC is quick and simple
• C. ABC requires no data
• D. ABC can be complex to explain and may not benefit if overhead costs are small

Answer: (D)

Activity-based costing (ABC) often gives more accurate cost information by tracing overhead to specific activities, but it comes with drawbacks. Setting up ABC requires identifying all the activities that consume resources, measuring how much each activity is used, and selecting appropriate cost drivers. That makes the system data-heavy and time-consuming to implement and maintain. Because of this complexity, explaining how ABC works to stakeholders can be challenging, and if overhead costs are small or the potential savings from refined costing are limited, the benefits may not justify the effort. That’s why the statement that ABC can be complex to explain and may not provide significant benefit when overhead costs are small is true. The other points aren’t generally correct: ABC does require data and is not typically quick and simple, and while ABC can allocate overhead to products, it isn’t guaranteed to allocate every single overhead cost in every situation.

Activity-based costing (ABC) often gives more accurate cost information by tracing overhead to specific activities, but it comes with drawbacks. Setting up ABC requires identifying all the activities that consume resources, measuring how much each activity is used, and selecting appropriate cost drivers. That makes the system data-heavy and time-consuming to implement and maintain. Because of this complexity, explaining how ABC works to stakeholders can be challenging, and if overhead costs are small or the potential savings from refined costing are limited, the benefits may not justify the effort. That’s why the statement that ABC can be complex to explain and may not provide significant benefit when overhead costs are small is true.

The other points aren’t generally correct: ABC does require data and is not typically quick and simple, and while ABC can allocate overhead to products, it isn’t guaranteed to allocate every single overhead cost in every situation.