Response to the following problem:
Kaplan plc makes a range of suitcases of various sizes and shapes. There are 10 different models of suitcase produced by the business. In order to keep inventories (stock) of finished suitcases to a minimum, each model is made in a small batch. Each batch is costed as a separate job and the cost for each suitcase deduced by dividing the batch cost by the number of suitcases in the batch. At present, the business derives the cost of each batch using a traditional job-costing approach. Recently, however, a new management accountant has been appointed who is advocating the use of activity-based costing (ABC) to deduce the cost of the batches. The management accountant claims that ABC leads to much more reliable and relevant costs and that it has other benefits.
Required:
(a) Explain how the business deduces the cost of each suitcase at present.
(b) Discuss the purposes to which the knowledge of the cost for each suitcase, deduced on a traditional basis, can be put and how valid the cost is for the purpose concerned.
(c) Explain how ABC could be applied to costing the suitcases, highlighting the differences between ABC and the traditional approach.
(d) Explain what advantages the new management accountant probably believes ABC to have over the traditional approach.