Super_Bakery_Costing

Activity Based Costing in Super Bakery Michael Magons Accounting ACC/561 March 18, 2012 Alanna Jones Activity Based Costing in Super Bakery Super Bakery was founded by Franco Harris in 1983. This bakery is not typical of other bakeries, it may manufacture its own dough, but all delivery, cooking, and packaging is outsourced (Davis & Darling, 1996). Super Bakery uses an activity based costing system, and described here is why that costing method was chosen for Super Bakery by its managers. Job costing and process costing were other alternatives Super Bakery could have used and pros and cons for these systems are also included here. Activity Based Costing A firm that meets certain criteria may find activity based costing more efficient and convenient than either job or process costing. Super Bakery changed the manufacturing process by creating and distributing their product in a new vacuum sealed packaging (Davis & Darling, 1996). A new manufacturing process that significantly changes traditional costing is a sign that activity based costing should be used (Kimmel, Kieso & Weygandt, 2009). Diverse product lines that require many steps also indicate that activity based costing should be used. Super Bakery purchases ingredients, has them shipped and stored, manufactured into dough at its own plant, shipped from there to bakeries participating in Super Bakery business, marketing, product design, packaging of meals and bulk items, and shipping from a bakery to a purchaser. In 1996 Super Bakery handled all these steps with nine employees. Its virtual company design required it to organize all production and delivery without performing it itself, and activity based costing is a recommended method for a diverse company like this. Is Activity Based Costing Better Job and process costing work well when accounting for a single job or manufacture of a single product (Kimmel, Kieso & Weygandt, 2009). Super Bakery is not a simple job or single product, and with the complexity of this virtual company it makes sense to choose activity based costing rather than job or process costing. Each cost pool is identified and all costs for that pool are applied to that area. A cost pool for Super Bakery is dough production or delivery of a finished product. Super Bakery could create a pool for each subsidiary it uses for each step and use this information to streamline its business. Each cost pool would have the same drivers no matter what part of the country they were in. Computing overhead costs and rates for each subsidiary gives Super Bakery specific activity based information about each subsidiary. For example, comparing cost pool information about shipping prices in different parts of the country could give Super Bakery negotiating power with higher priced subsidiaries or give Super Bakery the opportunity to allocate its resources differently. One drawback activity based costing has is that it can be expensive to use, but Super Bakery has a low overhead itself and posts 20% or higher profits yearly so this does not appear to be a problem (Kimmel, Kieso & Weygandt, 2009). Conclusion Cost pools separate different activities from each other to calculate how efficient they are. Prediction of overhead costs and control over cost pool expenses gives Super Bakery management information that it uses to select which subsidiary to use for different steps in its product line. Activity based costing provides this information inside those cost pools that job or process costing do not define well, and Super Bakery uses its finances efficiently enough to make activity based costing work for it efficiently. References Davis, T. R. V., & Darling, B. L. (1996). ABC in a virtual corporation. Management Accounting 74(9), Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2009). Accounting: Tools for business decision making (3rd ed.). Hoboken, NJ: John Wiley & Sons