Costing Methods Essay

Franco Harris’ company Super Bakery, Inc. has seen significant success along with continued growth throughout its existence. The authors point out that the company has enjoyed a 20% average growth “during most of its existence” (Kimmel, Weygand, & Kieso, 2009). The purpose of this analysis is to identify strategies used by the company, discuss the agreement for the company to install an activity based costing system, and explain why a job order process system would be another viable option for Super Bakery that can help it maximize profits. Strategies Used by Super Bakery, Inc. ’s Management Super Bakery, Inc. iscovered how to infuse doughnuts and baked goods with protein and vitamins, which they marketed and sold to institutions, such as schools. The Super Bakery founder created a virtual company, and by drawing on cooperating companies and organizing the workflow, reduced staffing needs, overhead, and costs. According to Kimmel, Weygand, and Kieso (2009), “the goal [was] to add maximum value to the company while making the minimum investment in permanent staff, fixed assets, and working capital” (p. 865). To be profitable in the institutional foods market, Super Bakery had to apply strategies that optimized the process.

Therefore Super Bakery’s initial strategy was to outsource manufacturing, warehousing, and distribution of its products to decrease overhead expenses and increase capital. The next strategy was to install a tracking system that assigned costs to individual orders. This gave the business a closer look to “identify the costs associated with the activities performed in the business—manufacturing, sales, warehousing, and shipping” (Kimmel, et. al. , 2009, p. 865). The last strategy was implementing Just-in-Time delivery decreasing customers and consumers’ inventory costs related to stocks of merchandise.

Why Install the ABC Super Bakery suspected it had a wide variation in costs for products sold in different parts of the county (Kimmel, et. al, 2009, p. 865). Under the traditional costing method, costs were spread over the entire customer base and costs with high profit margins were subsidized with orders with low profit margins (Kimmel, et. al, 2009, p. 865). According to Kimmel, activity-based costing (ABC) allocates overhead to multiple cost pools (2009, p. 867). This type of costing allows a company to drive costs to the specific activities that incur the costs.

In traditional costing the costs are allocated to jobs or departments (2009, p. 867). ABC allows Super Bakery to more appropriately categorize its costs and therefore to have a better understanding of what the actual drivers for cost are for each activity and what costs need to be assigned to each product. This way, the correct margin can be ascertained for each product and the company can determine if it is actually making money on the products it is selling. Agree with Reasoning for ABC, Why or Why Not? The decision to use the activity-based costing (ABC) depends upon the products sold by the company and the size of the organization.

An article written by Elhamma shows studies have been made to indicate the relationship between the firm size and the performance of the organization. This study found that the management accounting system based on ABC method results in a better performance for the companies using this system. In addition, large enterprises have an interest in adopting this new method of management accounting (Elhamma, 2012, p. 90-102). Super Bakery’s (SB) has partnered with other companies to outsource the activities of selling, manufacturing, running their warehouse, and shipping of their products.

To realize a profit, SB uses the ABC method within each outsource company partnered with. Activity is tracked and cost can be calculated by each activity (Kimmel, et. al, 2009, p. 865). Super Bakery can benefit from using ABC costing system because they will understand the bakery’s true costs, resource to each of their partnered organizations. The bakery can avoid many potential pitfalls that can result from using traditional costing method. ABC is an accounting technique designed to guard against potentially serious financial problems when an organization’s accounting cost deviates significantly from its actual cost (Pandey, 2012, p. 12) Job Order or Process Order Work System The work system that would be best suitable for Super Bakery’s Inc. Management is the job order process. The job order process assigns costs to each job or to each batch of goods which has its own distinguishing characteristics. The objective of the job order work system is to compute the costs per job in which at each point in the manufacturing process are providing a service, and identify its associated costs. A job order work system measures costs for each completed job rather than for a set time period.

This costing system will provide unit cost information for product pricing, inventory valuation, cost control, and financial statement presentation. The job order work process will be very beneficial for Super Bakery’s Inc. because this will allow management to see where all the costs lie and make necessary adjustments to keeps costs to a minimum and maximize profits. The job order work process will also allow management to look at alternative options for the various jobs involved in the manufacturing of products but as to not impact the quality of the products being produced (Kimmel, et. l. , 2009). Conclusion After evaluating the company a bit further, the strategies identified show why a company like Super Bakery, which is a virtual company, can succeed in providing a product and service its customers’ needs at a low cost. The company’s decision to move to an ABC system helped it track profitability more accurately, but it was also made known how a job order process system can also help the company maximize profits. Continuing to follow these habits, can propel the company to even greater success than what it has already been experiencing.

References

Elhamma, A. (2012). The relationship between firm size, activity based costing and performance: an application on Moroccan enterprises. Journal of Accounting – Business & Management, 19(1), 90-102. Retrieved from https://ehis. ebscohost. com Kimmel, P. , Weygandt, J. , & Kieso, D. (2009). Accounting : Tools for business decision making (3rd ed. ). Hoboken, NJ: John Wiley & Sons. Pandey, S. (2012, November). Applying the abc’s in provider organizations. Healthcare Financial Management, 112-120. Retrieved from https://ehis. ebscohost. com