POTENTIAL PITFALLS OF ACTIVITY BASED COSTING

Companies that implement activity-based costing
run the risk of spending too much time, effort, and
even money on gathering and going over the data that
is collected. Too many details can prove frustrating
for managers involved in ABC. On the other hand, a
lack of detail can lead to insufficient data. Another
obvious factor that tends to contribute to the downfall
of activity-based costing is the simple failure to act on
the results that the data provide. This generally happens
in businesses that were reluctant to try ABC in
the first place.

In 1999, Gary Cokins wrote an article aimed at
certified public accountants who have difficulty embracing
activity-based costing. In ‘‘Learning to Love
ABC,’’ Cokins explains that activity-based costing
usually works best with a minimum amount of detail
and estimated cost figures. He backs this up by stating
that ‘‘typically, when accountants try to apply ABC,
they strive for a level of exactness that is both difficult
to attain and time-consuming—and that eventually
becomes the project’s kiss of death.’’
In 2000, Cokins wrote another article entitled
‘‘Overcoming the Obstacles to Implementing Activity-
Based Costing.’’ In this work Cokins noted that
‘‘activity-based costing projects often fail because
project managers ignore the cardinal rule: It is better
to be approximately correct than to be precisely inaccurate.
When it comes to ABC, close enough is not
only good enough; close enough is often the secret to
success.’’ Cokins also notes that the use of average
cost rates, the use of overly detailed information, and
the failure to connect information to action can also
hinder ABC projects. By understanding these concepts,
Cokins feels that CPAs can enhance their roles
as business partners and consultants.
Another limiting factor is that activity-based
costing software can be pricey. As Mark Henricks
wrote in a 1999 article for Entrepreneur: ‘‘Most ABC
practitioners find that special-purpose ABC software
is required to make the task manageable. At $6,000
and up for one package sold by ABC Technologies,
software can add significantly to outlays for this type
of accounting technique. There are, however, some
pilot packages available for $500.’’
Time can also be a factor for businesses seeking a
quick fix. Henricks notes that ‘‘although some companies
see results almost instantly, it typically takes
three months or so for most businesses to experience
the benefits of ABC. And depending on your product
or business cycle, it could take much longer.’’