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Abc Costing

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Nick Lagrange November 7, 2012 Writing Assignment 2

ABC Costing

1. Briefly describe the ABC system adopted in Super Bakery.
The ABC system implemented by Super Bakery was done to separate costs by customer instead of allocating overhead evenly across the entire customer base. Their reason for doing this was simple; they wanted to see how profitable each customer was. In the nature of this business, it is described in the article that “…very few customers’ orders consume the same amount of resources.” (Davis 4) Because of this reason, different customers produced different amounts of profits, and this is one reason that Super Bakery adopted an ABC system.
Another reason this company adopted the ABC system was to track outside contractors. The business is a virtual corporation, and the people who work for them often have the power to make more decisions. If they are too free to make these decisions on their own, it often happens that they try to do certain things with money to make their job easier. While doing this, it could be hurting the virtual company at the same time. With an ABC system in place, the type of spending brokers, contractors, and other outside workers is monitored closer and can be tracked more easily.

2. Do you think it is necessary to adopt an ABC system in Super Bakery? Why or why not? What are the benefits/costs?
I believe that with this type of business, it is absolutely necessary to have an ABC system in place. Because of the way this business generates revenue, allocating overhead evenly just isn’t accurate enough. Since the market was described as highly competitive, one of your most profitable customers might want to switch companies. Without an ABC system, there would be no way to see how profitable each customer was, resulting in a lot of lost revenue. With an ABC system, knowing how profitable a customer is would be extremely beneficial. This could help you negotiate with a customer and provide discounts so that they do not leave your company to go to a competitor.
Although ABC systems cost more, they can be a huge asset to a company in the long run. They take more time and resources to run, but knowing exactly where money is being allocated is a huge advantage.

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