Costing methods and applications

Finance

Activity-Based Costing at Super Bakery

Super Bakery, founded by Franco Harris the former Pittsburgh Steeler, supplying baked goods to schools and other institutional. The goods supplied include doughnuts enriched with vitamins, minerals and protein, and other baked goods. The firm has been highly successful, with a growth rate approximating 20% a year.

The success of the firm may be at least partly attributed to the strategies adopted. The first strategy is that of differentiation; supplying goods that are different from other on the market with the difference being one that the buyers value (Mintzberg et al., 2008). The creation of baked goods that have a high nutritional content, selling to a market where there are diverse need which were formerly seen as conflicting; the desire for sweet baked goods by students and the need for health conscious food by those who run the institutions. The strategy of differentiation was a good, but a good idea, even if it leads to a first mover advantage, is not sufficient to lead to success without a good operational strategy (Mintzberg et al., 2008).

The second key strategy was the way that the firm was set up. Super Bakery was set up as a virtual organization. A virtual organization is one where there are few assets and only the core functions take place internally; operations are carried out by third parties. In the case of Super Bakery the firm merely takes orders, the rest of the process, from selling, through to manufacturing and delivery are all outsourced. The benefits of this approach are significant; it minimized the level of capital investment which is required, which also reduces the risk associated with setting up the firm. The virtual organization may also benefit from the expertise of the different outsource suppliers who may be experts in the service they supply. Conversely, the outsourcing also increases a firm's reliance on other parties and reduces the control they have over the supply chain.

As the firm has grown there has been a change in the strategy the firm used to manage costs; Super Bakery has adopted of activity-based costing (ABC). The adoption of the strategy is likely to have been in response to the noted challenge associated with controlling of the outsourcing costs. ABC it provides a higher level of transparency regarding the costs which are incurred for each customer (O'Guin, 1992). It was known that some customers were far more profitable than others, and it was believed that the high level of profit from some customers was subsidizing the less profitable customers. 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 batches of can. 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.