February 4, 2013
Super Bakery, Inc is a nationwide supplier of mineral, vitamin, and protein-enriched doughnuts and other baked goods to the institutional food market, specifically school systems. Super Bakery has been doing well, with sales growing at an average annual rate of twenty percent (Kimmel, 2009). Although sales are doing great, the company has had issues with controlling the cost of outsourced activities. Super Bakery was using a traditional costing method and decided to switch over to the activity based costing method which would help with the issues the company was facing. In this paper we will discuss Super Bakery’s decision to switch to the ABC method.
Management of Super Bakery, Inc used strategies consistent with the traditional costing system. This type of system applies indirect costs to products based on a predetermined overhead rate and treats overhead costs as a single pool of indirect costs. In a traditional costing system indirect cost are first indentified, then indirect costs are estimated for the appropriate period. Next a cost driver is chosen with a link to the cost. An estimated amount for the cost driver is selected for the appropriate period. The predetermined overhead rate is computed and overhead is applied to products using the predetermined overhead rate. Although this system calculates overhead cost, it was not accurately defining costs and profit margins.
Management decided to switch to an ABC system because the traditional costing methods were spreading costs over the entire customer base. Each order appeared to cost the same amount to complete. Orders with high profit margins were subsidizing orders with low profit margins (Kimmel, 2009). With the activity based costing method costs are assigned more accurately. The ABC system was the best choice for Super Bakery. This method allocates overhead to multiple activity cost pools, and assigns the activity cost...