Cintra is the Management Accountant of Fine pens Ltd. Thecompany manufactures various types of pens ranging from cheapdisposable units to expensive units which are intended to bereusable. Both ball point pens and fountain pens are produced. Thecurrent cost allocation system in use is Absorption costing.andCintra is very comfortable with the use and application of thiscosting method.
Ram has recently joined the company in a senior capacity. BothCintra and Ram were recently discussing the current costing methodand another method, namely Activity based costing. Ram suggested aswitch to Activity based costing as the method of cost allocation.
Required:
a) Briefly state why Ram may have suggested such a switch .Relate to the scenario describedabove.
b) List and briefly describe 3 advantages of Activity basedcosting over Absorptioncosting. ( 3 marks)
