Costing Methods

ACC/561

March 12, 2012
Monique Smalling

Super Bakery

Super Bakery is a virtual company that handles only core functions of the business while all other aspects are outsourced. Even though the bakery became a leader in the institutional baked goods market the company had reoccurring issues containing costs and ensuring the quality of their products. The management team at Super Bakery decided to implement and activity based costing plan to help maximize profits and ensure quality products to customers. However, Super Bakery had an additional challenge when implementing a cost system. Because the majority of functions are outsourced, the costing plan needed to help the company maintain control over those outsourced functions
Strategies
In order to make a costing system functional in a virtual company, Super Bakery needed to put into place several strategies that would cater to the specific virtual challenges. The first simple strategy that was put into place by Super Bakery was simply to question industry practices and to develop unique strategies and tactics (Davis & Darling, 1996). When management asked these questions they discovered that there was a market that traditionally received poor and underrated service; the school systems and institutional food market. The bakery developed healthy baked goods to meet the ever-increasing nutritional standards that government run facilities faced. This strategy allowed the company to increase sales while other fatty and sugar-based bake goods were declining in sales. Second, Super Baker controlled costs by refrigerating the product, vacuum sealing, and distributing it nationally allowing them to build a national reputation and presence in the market (Davis & Darling, 1996). The third strategy helped contain costs as well as support customers. Their customers received lower costs because the company acquired certain supplies through government such as flour, butter, and fruits (Davis & Darling, 1996). As well as supplying complete prepackaged meals to schools and having expedient delivery to avoid inventory and stock out costs. Last, Super Bakery reduced their overhead and capital investment by outsourcing the major functions of the business. They do not sell or distribute their own products, outside contracted vendors handle these duties.
The Reasoning behind ABC An activity based cost system was put into place by Super Bakery so that profitability could be easily tracked and allow management to monitor and track the service and performance of their outside contractors more closely. The activity based cost system was the right choice for Super Bakery. Since Super Bakery is a virtual corporation the emphasis needs to be more on the number of orders that are processed instead of monetary value of each order. The reason is that the number of orders dictates the costs that are charged to Super Bakery but their outside contractors. The system that the bakery uses allows historical capture of cost drivers. This allows management to accurately calculate the real costs of processing each order and servicing each distinct customer. Super Bakery is much more accurate in its pricing of orders, recovering the costs of their customer service, and their ability to earn their targeted profit amount (Davis & Darling, 1996). Which System Works Best. If Super Bakery was a traditional corporation perhaps a traditional costing system would be better suited to them. As a virtual corporation, the cost drivers are not typical and the need to be able to track and capture the data accurately becomes imperative. In a standard system overhead expenses are allocated to the products and in turn distributed over the entire customer base. A standard system assumes that each customer’s order will be the same average each time, which is incorrect because it is very seldom that customers and retailers consume the same amount of resources consistently.
Conclusion
Super Bakery chose the correct costing system for the business. An activity based cost system allows them to maximize profitability as well as catering to each specific client. The virtual corporation is able to monitor expenses with a minimal in-house staff while controlling outside vendor costs without sacrificing product and customer service excellence.

References
Davis, T. R. V., & Darling, B. L. (1996). ABC in a virtual corporation. Management Accounting 74(9).