(A) XX glass limited has been in operation for the past seven years and manufactures shower doors. Since its establishment, the company has used a traditional overhead absorption costing system. However, the managing director, Peter Kenny, is considering making a change.
Over the past few years, Peter has streamlined the production process and reduced materials and labor costs significantly. He has now turned his attention to the company’s overhead costs and when one of his suppliers mentioned an alternative overhead costing system, activity-based costing (ABC), he asked for your assistance.
Prepare a report on activity-based costing (ABC) for Peter Kenny, managing director of XX glass limited, that:
(a) explains the difference between traditional overhead absorption costing and ABC.
(b) Describes the operation of an ABC system.
(c) Outlines the advantages and disadvantages of adopting ABC in XX glass limited