Running head: COSTING METHODS

Costing Methods Travis Carr ACC561 June 12, 2012 Guy Gagliardi University of Phoenix

COSTING METHODS Costing Methods Super Bakery, Inc. was created by Franco Harris in 1990, after many successful years playing professional football for the Pittsburg Steelers. Super Bakery, Inc. is a nationwide supplier of mineral, vitamin, and protein enriched doughnuts and other baked goods to the institutional food market, and primarily school system. (Davis & Darling, 1996). Like other many large organizations Super Bakery, Inc. decided that outsourcing much of their activities such as selling, manufacturing, warehousing, and shipping would be more productive for their virtual company. Instead, Super Bakery,

Inc. decided to only keep the core, strategic functions of the business performed inside the company. (Davis & Darling, 1996). The outsourcing of company activities was received favorably and has allowed Super Bakery Inc. sales to increase at the rate of 20% annually. This papers purpose is to determine the strategies management used when installing the organizations new activity-based costing system (ABC). Also, this paper will determine whether or not job order costing or process order costing systems would work for the organization. Management Strategies As previously discussed, Super Bakery, Inc. is a virtual corporation in which only the core, strategic functions of the business are performed inside the company. (Davis & Darling, 1996). Being that Super Bakery, Inc. has little activities performed within the organization, and have outsourced their other needs to a network of other organizations, they have limited permanent staff, fixed assets, and working capital which has allowed their business to grow in sales. This strategy maximizes an

COSTING METHODS organizations maximum value and minimized overhead and other expenses. (Davis & Darling, 1996). ABC System Super Bakery, Inc has made a decision to install an ABC system because they have found that their previous system was not accurate enough to track customers as they wished. Management believes that by switching to an ABC system, customer orders can more easily be tracked and pricing can be set more accurately in different locations. The old system had higher priced locations subsidizing lower price locations so every customer order seemed as though they were of equal value.

I agree with Super Bakery, Inc. managements decision to install an ABC system. If the ABC system works like it is supposed to, then every customer order can be tracked separately and therefore a better pricing model can be made by the organization. By using unit cost rather than total cost, ABC system show a more detailed view of the entire costing system. Also, the ability to now track distributors, suppliers, etc., can drastically affect pricing models and make distribution more efficient. (Davis & Darling, 1996). Costing Systems The main problem with using a job order system for Super Bakery, Inc., is that the organization outsources most of its activities. Since most of the activities are outsourced, it is nearly impossible to create a system with direct labor costs every time. The only possible way that a job order system could work is if the current system of manufacturing was scrapped and the organization decided to manufacture everything themselves. In that case they could estimate the direct labor costs of every job correctly.

COSTING METHODS Similarly to the job order system, the process order costing system would also not work well for Super Bakery, Inc. The reason for this is because the way process order costing works is that overhead is used when dealing with activities. By outsourcing much of their activities to other organizations, it would be very difficult for

other organizations estimates to match each other. (Kimmel, Weygandt, & Kieso, 2009). It seems clear that the best costing system for Super Bakery, Inc., is the ABC costing system that has been implemented. Job order costing and process order costing would simply not be reliable or accurate enough because of the outsourcing nature of Super Bakery, Inc., majority of activities. Conclusion By implementing the ABC system Super Bakery, Inc., will have more accurate monitoring of their customers orders, suppliers, vendors, distributors, etc. ABC systems will allow for a much more effect pricing model in which the organization can use to create higher profits and less wasteful distribution to areas that do not need the previously sent products. The ABC system has truly a good decision on behave of Super Bakery, Inc., management and will help their organization succeed in the future.

COSTING METHODS Reference Davis,T., & Darling, B. (1996, October). ABC in a Virtual Corporation. Management Accounting, pp. 18-26. Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2009). Accounting: Tools for business decision making (3rd ed.). Hoboken, NJ: John Wiley & Sons