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In a situation where the profit margin can vary greatly between customers that are charge the same price, increased transparency of costing will empower the company to adapt their pricing system so that costs could be more effectively recouped in the way the contracts are negotiated (O'Guin, 1992). Activity-based costing allows for the different stages of a process (the activities) to be costed in an effective manner, including costs that are traditionally assumed as overheads. In maybe argued that the management made a very good decision; the process was one suitable for activity-based costing, with a number of different activities taking place, and the benefits of increasing transparency are likely to outweigh the costs of the implementation with the way it will help both control costs by understanding where costs are incurred, as well as with pricing strategies (O'Guin, 1992).
When adopting activity-based costing the firm could choose from two different types of costing model; job order system costing and process order system costing. In both cases there are commonalities, but there are also some significant differences. Process costing is most frequently found in organizations where there the operations involve continuous processes. For example, a canning factory has a continuous process, although they may vary the contents of the different...
As this model is based on a continuous process, it is not facilitate a differentiation between different types of customers, with the assumption that they are all compatible. For many organizations is may be true, but it is not truth is simple bakery, therefore process costing is unlikely to be the best approach to activity-based costing.
The alternate is a job processing system, where activity-based costing is undertaken for each individual order or customer. Job processing costing allows for the divergences the customer base to be considered, for example if Super Bakery are providing the doughnuts to a school that is 30 miles away, and to a school that is 1 mile away, the costing processes will allow for the additional costs associated with the delivery which is further. Therefore, the job processing approach is most suitable for Super Bakery, as it gives them the flexibility they need to assess their known problem; the different costs associated with different customers which was not sufficiently transparent under the absorption costing method.
References
Mintzberg Henry, Ahlstrand Bruce, Lampel Joseph B. (2008), Strategy Safari: The Complete Guide Through the Wilds of Strategic Management, Financial Times / Prentice Hall
O'Guin, M, C, (1992), the Complete Guide to Activity-Based Costing, NYIF
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