Two Disadvantages of Activity based Costing on the Basis of Reasonable Ground

1. Difficult to Calculate Some Overhead’s Cost relating to its Product

Many overheads or indirect expenses can easily assign to products. We can easily calculate inspection expenses per product, if we multiply per inspection rate with total no. of inspections. But some indirect expenses’ cost can not calculate relating to its product in activity base costing system. If such unallocated overheads cost is head, then whole system and calculated cost per unit under this system will befall incomplete.

For Example

Four 4 supervisors go to a restaurant. One of them does not want to eat, he orders milk. The others order full meal. The total bill comes to Rs. 5000/-; are you going to divide this bill by numbers of supervisors. In a sense, activity based costing is like this. You have to put the resources in the right activity, right pocket.

2. Customer Based Costing is better than Activity Based Costing

When a company gets order, at that time company has to complete it on time and some time company has to take short term debt due to purchasing of product, if company estimates its cost less. But some sometime, Company does not get its payment on time. So, Company has to pay highest interest due to delay of repayment of debt. Now, this is also cost which can not allocate the product but allocate customer. All other cost which we understand very high like manpower, maintenance does not affect the total cost of product. I think this is the limitation of activity based costing and customer based costing approach will better in given case.