Which is a potential disadvantage of activity-based budgeting?

The appropriate selection highlights a recognized challenge associated with activity-based budgeting. This budgeting approach entails a detailed analysis and allocation of costs based on specific activities that drive expenses within an organization. To effectively implement activity-based budgeting, considerable effort is required to identify and define these activities accurately.

This process can be time-consuming and resource-intensive as it involves examining all operations, determining cost drivers, and assessing the relationship between activities and costs. The complexity increases with larger organizations or those with diverse product lines, which may result in a substantial burden during the budgeting process.

While the other aspects of activity-based budgeting, such as its potential for simplifying cost management, can be advantageous, they do not negate the inherent difficulty in the initial setup and identification phase. Thus, accurately identifying activities represents a significant hurdle that organizations must overcome to reap the benefits of this budgeting method.