Super Bakery, Inc. – Costing Methods
Norman Thompson
ACC/561
July 24, 2010
In today’s economy the business world has changed tremendously with the advances of computer systems, global competition, and innovation in technology. Because of these changes businesses compete to keep their products and services profitable as well as keeping a strong customer base. The main challenges for keeping a business successful are managing the cost of services and products while keeping the company lean for better profits. Super Bakery (SB) maintains steady profits by keeping the core functions within the business and outsourcing additional functions. A discussion explaining Super Bakery ways on how the company manages to maintain a
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With this system each customer’s order cost the same amount to complete causing orders with high profit limits to subsidized orders with low profit limits making it difficult for Super Bakery to know the true cost for an order. The company changed to the activity-based costing (ABC) system allowing the managers the ability to recognize the cost and profit margins for each sale. The ABC system associates the costs with the activities allowing managers the opportunity to access a system that allocates overhead costs that uses multiple bases. Costs can be traced back to each individual’s account regardless of the product provider letting managers know which products are profitable and which ones are not. The traditional costing system allocates cost to departments or jobs instead of overhead cost pools. The traditional costing system makes it difficult to know which activity or product is making a profit. The ABC method is a good fit for Super Bakery. The job order cost system works for SB because it assigns cost to each account identifying services or products that are profitable. Therefore, access to the company’s profits for each individual job and the profitability of the outsourced activities allows managers to make educated decisions about the company’s financial needs. By using financial reports managers
The week four individual paper addresses the implementation of Activity Based Costing (ABC) by Super Bakery, Inc., a virtual corporation founded by Franco Harris. Specifically, management strategies, the reasoning behind an ABC system, and the alternatives of a job order cost system or a process order cost system are assessed for this enterprise.
Overhead costs are not in proportion to the production output because of the method they are using. This leads to inaccurate pricing and costing decisions. An Activity Based Costing System would help find the real relationship between the products produced and overhead.
The week four individual paper addresses the implementation of Activity Based Costing (ABC) by Super Bakery, Inc., a virtual corporation founded by Franco Harris. Specifically, management strategies, the reasoning behind an ABC system, and the alternatives of a job order cost system or a process order cost system are assessed for this enterprise.
The account issue addressed in this case study was whether to continue with the existing costing method for each product line or implement a activity-based costing method. The ABC method allows for an organization to allocate direct and indirect costs to products and obtain an accurate level of costs and profit for each unit produced, thus allowing the company to improve their overall operational effectiveness. ABC does differ from the existing costing method described in the case as the old method does not account for volume related overhead costs which must be allocated to the specific ODD and TGC products.
Under an ABC system, the allocation of costs to products is achieved through at least four analytical steps. Firstly, costs are grouped into activity levels. Secondly, cost drivers are
Under a traditional system, overhead cost is allocated to an activity based on hours or rates for direct labor or machine usage. However, this approach does not clearly indicate how much overhead cost will be needed in order to complete a job through a particular function. ABC methodology is to be used as an alternative to traditional accounting where a business 's overhead costs (indirect costs such as electrical energy consumption for heating or cooling, or indirect cost associated with marketing) are allocated as a proportion of direct costs, to an activity. This approach is unsatisfactory because there can be cases where two activities could absorb the same direct costs
Super Bakery, Inc. was founded in 1990 by Franco Harris, former Pittsburgh Steelers' running back. The company is a supplier of doughnuts enriched with minerals, vitamin, and protein as well other baked commodities to the primary school systems and institutional food market throughout the nation. Since it's a virtual corporation, the core strategic functions of the business are carried out within the company. On the other hand, the other activities of Super Bakery, Inc. are outsourced to a network of external organizations. The business in turn organizes the work flow of and draws together the external companies in this process. This helps the company to add maximum value while making minimal investments in working capital, fixed assets, and permanent staff. The outsourcing to a network of other companies has enabled Super Bakery to increase its sales at average annual rate of 20 percent.
As previously mentioned, the use of activity-based costing gives Kemps an advantage when competing for customers in an ever more competitive and growing market. However, the ability to succinctly distinguish how many small changes, when taken together, can have a large impact on cost savings (and therefore profit), is necessary in order to convince customers who may not be familiar with the many benefits of ABC. Mainly, management would want to demonstrate how the cost savings that they enjoy are ultimately passed on to their customers, perhaps by showing some of the improvements that have been made to their own company as a result of implementation, specifically focusing on advancements that would have a direct impact on the customer’s business.
daily using an original recipe. It was slow-simmered for from four to six hours and served the
An organization costing system is a system that helps the management with the strategy planning while the system plays an important role in providing accurate cost information about the products and customers (Curtin, 2006). UPS utilizes the Activity-Based Costing (ABC) system. ABC assumes that activities cause costs and that cost objects create the demand for activities (Marx,
Also, according to break-even analysis operating with the single mold and excluding warehousing costs, a minimum of 12,035 units must be sold to break even. Under a similar situation with the double mold, 15,507 units must be sold to break even, which is about half of the optimistic sales projection. Also under the optimistic sales projection, a positive return on investment is expected. Because the company is turning profit,less additional investment is required. Additionally under the pessimistic and expected situation, the company turns losses, and under the optimistic projections, Chef’s Toolkit only has a net income of 13% of its revenues. Selecting Preferred alternative According to the above information and the projected pro-forma statements, Dale Reid should not invest his money in the company. The company’s lack of current assets, high expenses and low per-unit revenue create an unfortunate and unprofitable investment in pessimistic and expected situations. Only in the optimistic production and sales does the company begin to turn profit, but this profit is low. Chef’s Toolkit needs desperate restructuring and additional revenue sources before Dale Reid should invest. Developing
candidates for ABC. One reason for this is that in the services industry a great
And also this phase includes activity analysis and cost structure analysis. Activity analysis within ABC evaluates resource consumption through the identification of activity. Activity analysis provides information on what work is done, how work is done, quality of the work, time to perform the work, output of the work, patient and/or supplier relationships, and service relationship. Cost structure analysis After the activities were analyzed, the recorded activities were aggregated into activity centers, known as cost pools or cost centers, and the costs were calculated ( John, 1992) .
When it comes to any business, company, or firm there will always need to be some way or system that they use to see and calculate how they are doing cost wise. Some companies think that production is going because of the system that is being used. But in reality a company can either be undercosting or overcosting their total cost that they should be using for a job that they produce. If a company doesn’t break down everything they will never really know if the system is hurting or benefiting the company. So when it comes to companies that are in a competitive market, Activity-based costing system (ABC system) would be best for the company to use. The ABC system is a costing method that helps identify the activities and then assigns the cost of each activity with resources to all products and services according to the actual consumption. This means that ABC system will give you a more accurate amount of costs that are being used for each activity. This summary report will outline functions when ABC is implemented, pros, cons, and comparing the ABC system other methods to give you a better understanding of how it works and how it can benefit a company.
While firms will likely benefit from ABC, the system is mainly an accounting and cost-based method of viewing and analyzing an organization and its activities. (Johnson, n.d.). ABC systems are designed to capture costs that appear on the revenue and expense statement only. This approach is flawed because it provides incomplete information. Management must also capture the cost of capital employed to produce a certain product or serve a certain customer. For example, if a customer insists on extended terms of payment, the additional carrying cost of Accounts Receivable associated with this customer must be captured in the ABC system. “Managers must focus on cost and capital.” (McDowell & Schnider, 1999).