Super Bakery's Costing Methods
Super Bakery’s Costing Methods
Assigning cost can be a tedious process, and traditional costing methods such as job order and process order costing systems will not accurately assign cost. Super Bakery, Inc., a company that produces nutrient enriched doughnuts, had to restructure their costing system in order to appropriately price their products. It was eventually decided to use activity based costing (ABC). The virtual nature of the company made this costing method a more accurate tool for allocating costs than the more traditional approaches. Super Bakery outsources most of their operations, including selling, manufacturing, and shipping. This was a strategic decision that was meant to minimize investment. For this reason, only strategic functions are performed within the company. This strategy has proven to be a successful one. Since its inception, in 1990, the company has grown at a steady rate. “Yet its traditional costing methods were spreading costs over the entire customer base” (Kimmel, 2009, p. 267), which was not accurate enough to make decision that would affect the company.
The switch from more traditional costing methods to ABC has been brought upon by changes in the modern business world, where traditional company structures and procedures do not apply any longer. These changes are attributed to technological advancements, globalization, and automation. “As a result, the amount of direct labor used by many industries has greatly decreased, and the total overhead costs resulting from depreciation on expensive equipment and machinery, utilities, repairs, and maintenance have significantly increased.” In order for Super Bakery to make better management decisions, ABC would be the appropriate way of allocating overhead. In order to understand why this was the right choice for Super Bakery, it is important to understand how overhead is allocated with ABC.
“ABC allocates overhead to multiple activity cost pools, and it then assigns
Assigning cost can be a tedious process, and traditional costing methods such as job order and process order costing systems will not accurately assign cost. Super Bakery, Inc., a company that produces nutrient enriched doughnuts, had to restructure their costing system in order to appropriately price their products. It was eventually decided to use activity based costing (ABC). The virtual nature of the company made this costing method a more accurate tool for allocating costs than the more traditional approaches. Super Bakery outsources most of their operations, including selling, manufacturing, and shipping. This was a strategic decision that was meant to minimize investment. For this reason, only strategic functions are performed within the company. This strategy has proven to be a successful one. Since its inception, in 1990, the company has grown at a steady rate. “Yet its traditional costing methods were spreading costs over the entire customer base” (Kimmel, 2009, p. 267), which was not accurate enough to make decision that would affect the company.
The switch from more traditional costing methods to ABC has been brought upon by changes in the modern business world, where traditional company structures and procedures do not apply any longer. These changes are attributed to technological advancements, globalization, and automation. “As a result, the amount of direct labor used by many industries has greatly decreased, and the total overhead costs resulting from depreciation on expensive equipment and machinery, utilities, repairs, and maintenance have significantly increased.” In order for Super Bakery to make better management decisions, ABC would be the appropriate way of allocating overhead. In order to understand why this was the right choice for Super Bakery, it is important to understand how overhead is allocated with ABC.
“ABC allocates overhead to multiple activity cost pools, and it then assigns