What is one major disadvantage of activity-based costing?

Activity-based costing (ABC) provides a detailed approach to assigning costs to products and services based on the resources they consume. One major disadvantage of this method is that it may provide excessive detail, leading to complexity that can be confusing for users who need to interpret the information. ABC breaks down costs into numerous activities, which can overwhelm managers trying to make decisions based on numerous data points and detailed cost allocations.

While detail is beneficial for accuracy in pricing and cost management, so much information can make it challenging to see the broader picture. Managers might struggle to effectively utilize all the data, leading to analysis paralysis where the intention of cost control and strategic decision-making may be hindered by the overwhelming nature of the information presented. This complexity can also result in difficulty in communicating findings effectively to stakeholders who may not be versed in the intricacies of ABC.

In contrast, traditional costing methods may provide more straightforward, albeit less precise, summaries that are easier for non-specialist stakeholders to understand. This highlights the balance between the depth of analysis and the clarity needed for effective organizational decision-making.