Management strategies and costing methods at Super Bakery Inc

Finance

Activity-Based Costing at Super Bakery

The management at Super Bakery has developed a very lean business model which is an efficient use of capital. The model is based on the concept of a virtual organization. In this business model the firm owns very few assets that are required for production; by outsourcing to third parties the firm does not need to make the investments that are traditionally associated with production companies. Furthermore, as Super Bakery does not run the facilities there are fewer considerations for ongoing operations. The virtual organization strategy is very effective and leaves the firm in a position which facilitates flexibility and has helped with the firms' ability to increase capacity, which has averaged 20% a year. If the firm had been a traditional organization with its own assets, increasing capacity may have been more difficult and required further investment. The firm has been successful; to remain successful there was a decision made by the firm to move to a system of activity-based costing.

The firms' management has been astute in their capital management, indicating a good financial awareness. It is logical that the same degree of astuteness is applied to the everyday management of operations, to ensure efficiency. The firm has moved from overhead or absorption costing to the use of activity-based costing (ABC). To understand why the management choose to move to ABC it is necessary to look at the basis of the alternate approach. Overhead costing is based on taking the fixed costs or overheads and then allocating them on a proportional basis to the different products (Drury, 2011, p78). The basis of allocation may vary, depending on a number of factors. For example, the costs may be allocated proportionally based on the percentage of sales each product accounts for, or based on the time taken to manufacture or manage the products. This was seen as a fair way of allocating the costs which are incurred regardless of the level of production or sales (Drury, 2011, p78). The approach is fairly simple, and different types of overhead may be allocated in different ways. When looking at management of costs the problem with absorption costing it that it may not always accurately reflect the way costs are actually incurred. There is the potential for costs to be allocated to products where they are not incurred. If doughnuts make up 50% of the sales and overheads are allocated on a 50% basis, it is assumed that the doughnuts are using 50% of the overheads. However, if they only take a short amount of time to produce, the allocation of the costs may not reflect the real use of the overhead resources. There is also the potential for under or over absorption (Drury, 2011, p92).

The benefit of activity-based costing is the ability to increase transparency by assessing the real costs associated with each product unit, or each customer. Instead of making assumption regarding the costs activity-based costing breaks down the different processes for a product and costs each element separately (Khataie et al., 2012, p369). The process takes the goods from the start through to the finish, this also allows for an assessment of costs that can differentiate between different customers (Shin et al., 2012, p932). It may cost the firm a great deal more to service one customer compared to another, even if the orders are exactly the same.

By moving to an activity-based costing system there will be a greater level of transparency regarding the operating costs. This will increase the quality of the information used to make management decisions, including which products to sell, how to price products and services and identifying which customers are most valuable to the firm (Shin et al., 2012, p933).

If the firm is to use ABC there are two potential approaches; a job order cost system and a process order system. The two systems are based on the same concept; identifying the actual costs associated by examining the costs through the different activities. Before implementing ABC, Super Bakery need to determine which of these two approaches will be most appropriate. To determine the best model for Super Bakery each of the models may be considered.

Process costing is used most commonly where there are continuous processes and the products are all either the same, or if not the same they will be very alike. The process is most useful hen there is no benefit to looking at costs associated with the different orders (Drury, 2011, p136). For example, a fast food firm such as McDonalds is making different products on an almost continual basis. There is no benefit to assessing the costs for different orders, as the costs associated with serving them all is fairly uniform; all of the customers are coming into the store and are sold in the same way .