January 30, 2012
Costing Methods Paper
Former Steelers’ running back Franco Harris created Super Bakery Inc., in 1990. “Super Bakery is a virtual corporation, in which only the core, strategic functions of the business are performed inside the company. The remaining activities—selling, manufacturing, warehousing, and shipping—are outsourced to a network of external companies”. When management suspected that the established cost method was making a sizeable difference in its real cost structure, it wanted a new way of assigning their costs. Management also supposed an extensive difference in the cost of serving their customers in other parts of the country. However, its established methods were distributing costs over the entire customer foundation. Management reviewed and eventually altered their system to recognize the costs associated with the task performed in the company. Super Bakery’s management thought it was necessary to install an ABC system because all of their customer orders appeared to be equal in price to complete. In actuality, high profit margin orders were financially supporting low profit margin orders. The company needed a system that would accurately assign the costs of each order. Installing the activity based system illustrated the cost and profit margins on each sale showed a discrepancy. “Super Bakery is now able to track the profitability of each customer’s account and the performance of outsourced activities. This doughnut maker, as a result, even knows the cost of the doughnut holes”! This decision was smart and could have been costly if the company did not recognize the need to change systems.
Process order cost system would work for Super Bakery because process costing will put in the cost based on the average number of doughnuts and other baked goods produced per day. Processing cost allows the managers to get detailed information on the...