The overall approach to activity based costing puts greater emphasis on account-by account visibility of financial performance than other forms of reporting. As the bakery in this example needs to manage a virtual corporation and they also want to drill into account-based financials, installing and using an ABC system is the best choice. This study also looks at the advantages of this approach over competitors as well.
Super Bakery
What strategies did the management of Super Bakery, Inc. use?
Realizing that they were in a highly competitive, and at times commoditized business, Super Bakery Inc., relied on a series of strategies to differentiate themselves from their competitors while also concentrating on key accounts. The bakery wisely concentrated on high-value segments and strategies that could drive greater profitability on an account basis. These strategies included concentrating on the school system segment of the institutional food market for schools, whom the company believed was poorly served with existing bakery products. Super Bakery also pioneered low calorie, vitamin enriched donuts that met USDA guidelines and strived to taste good too. This strategy proved prescient for the bakery as high-fat donuts began to decline due to the public's concern over healthy snacks and eating (Davis, Darling, 1996). The second strategy the Super Bakery relied on was avoiding the local market restriction of most fresh baked goods by refrigerating the product, vacuum-sealing it and distributing it nationally (Davis, Darling, 1996). This gave Super Bakery the opportunity expand distribution and gain market share in a highly fragmented market. Third, Super Bakery chose to collaborate with suppliers, distributors and key members of their value chain to further drive down costs for customers through the use of government-supported commodities (Davis, Darling, 1996). Finally, and what forms the basis of this case study is the decision by Super Bakery to become a virtual corporation by drastically reducing capital investment over time, leading to higher levels of profitability (Davis, Darling, 1996). Super Bakery manages its brand and marketing, yet does not manufacture, sell or distribute its products (Davis, Darling, 1996). All of these factors taken together have led to Super Bakery to become very competitive in their served markets, often gaining market share in key institutional and school markets.
Why did Super Bakery's management think it was necessary to install an ABC system? Do you agree with their reasoning? If you disagree, identify your recommended costing system, including your rationale, to management.
The Super Bakery management decided to install an ABC system so it could track profitability by accounts, and also it would give contractors greater flexibility in tracking outside contractors more effectively as well (Davis, Darling, 1996). The ABC system also provided the company with the ability to use a distributed order management system, which is critical to supporting their virtual organization. This would allow the company to also mange its costs across the entire value chain of the business with greater accuracy and precision. ABC Systems are commonly used for managing distributed manufacturing and distribution centers as they provide a high level of costing and pricing precision (Latshaw, Cortese-Danile, 2002).
Would a job order cost system or a process order cost system work for Super Bakery. Why or why not?
A job order cost system would not be able to provide the full functionality and cost traceability that the ABC system is. And it would also force the bakery into a more cost-based system over time due to their purchasing and supply chain timeframes (Davis, Darling, 1996). A job costing system would also lead to confusion over just which accounts were the most and least profitable as well. It would be a significant step backward for the bakery to do adopt a job order cost system. And the same holds true with a process order costs system, as it would force the bakery into an entirely different approach of accounting, one incongruent with how they are operating as a virtual corporation (Davis, Darling, 1996).
Controller Questions
What unique strategies and tactics did Super Bakery's management implement that caused sales to take off and continue to grow at an average rate of 20%?
First, the focus on the customer and their unique needs, from dietary and costing requirement to delivery schedules made possible with the ABC system gave the company significant competitive advantage. The bakery was able to become more customer-centric and stay focused on their needs over time as a result. Second, they were also able to better manage their virtual corporation around their distributed order management system. Several times in the case the point is made that the distributed order management system is essential for meeting and exceeding the expectations of customers over time (Davis, Darling, 1996). What the bakery did was align their IT systems to ensure a continually high level of customer satisfaction, designing them to surpass expectations on a consistent basis (Davis, Darling, 1996). It's a very unique case in that the company was able to use their accounting systems and activity-based costing to better serve customers and deliver high quality, low cost bakery items on or ahead of schedule (Davis, Darling, 1996). All of these factors worked together to completely revitalize the brand and help it grow over time.
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