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First, ABC requires a significant amount of time and, thus, cost to implement. If implementation is to be successful, substantial support is needed throughout the firm. An environment for change must be created that requires overcoming a variety of individual, organizational, and environmental barriers. Individual barriers are typically related to (1) fear of the unknown or shift in status quo, (2) potential loss of status, or (3) a necessity to learn new skills. Organizational barriers are often related to “territorial,” hierarchical, or corporate culture issues. Environmental barriers are often built by employee groups (including unions), regulatory agencies, or other stakeholders of interest.
To overcome these barriers, a firm must first recognize that these barriers exist; second, investigate their causes; and, third, communicate information about the “what,” “why,” and “how” of ABC to all concerned parties. Top management must be involved with and support the implementation process. Lack of commitment or nvolvement by top management will make any meaningful progress slow and dificult.
To overcome these barriers, a firm must first recognize that these barriers exist; second, investigate their causes; and, third, communicate information about the “what,” “why,” and “how” of ABC to all concerned parties. Top management must be involved with and support the implementation process. Lack of commitment or nvolvement by top management will make any meaningful progress slow and dificult.
Another problem with ABC is that it does not conform specifically with generally accepted accounting principles (GAAP). ABC would suggest that some non-product costs (such as those in research and development) be allocated to products, whereas certain other traditionally designated product costs (such as factory building depreciation) not be allocated to products. Therefore, most companies have used ABC for internal reporting, while continuing to maintain their general and subsidiary ledger accounts and prepare their external financial statements on he basis of a more “traditional” system—requiring two product costing systems and causing even more costs to be incurred. As ABC systems become more widely accepted, more companies may choose to refine how ABC and GAAP determine product cost to make those definitions more compatible and, thereby, eliminate he need for two costing systems.
One final criticism that has been leveled at activity-based costing is that it does not promote total quality management (TQM) and continuous improvement.
