Week 4: Costing Methods
The week four individual paper addresses the implementation of Activity Based Costing (ABC) by Super Bakery, Inc., a virtual corporation founded by Franco Harris. Specifically, management strategies, the reasoning behind an ABC system, and the alternatives of a job order cost system or a process order cost system are assessed for this enterprise.
Management Strategies
A virtual corporation is described as a technology-linked network of companies, suppliers, and customers that are used by a company to outsource non-strategic business functions (Hershkovitz, 2012). The management of Super Bakery, Inc. identified that they could reduce their costs in permanent staff, fixed assets, and working capital (Kimmel, Weygandt, & Kieso, 2009) by outsourcing these functions to other companies. In turn, they assumed the role of organizing workflow to oversee the processes manufacturing, storage, delivery, and sales of their products. As virtual corporations allow businesses to increase and improve performance they are able to take advantage of economies of scale and scope (Hershkovitz, 2012).
Reasoning for ABC System
During the process of creating a virtual corporation, the management of Super Bakery, Inc. identified significant variations in costs to serve customers in different areas of the country (Kimmel, Weygandt, & Kieso, 2009). In an effort to better control costs, management evaluated their traditional costing methods and found them to be inaccurate because costs were divided evenly over the entire customer base. To further complicate matters, as the company began to outsource multiple functions to other companies in their “virtual corporation”, they had no means to assess the specific costs associated with each step in the manufacturing and sales processes. As a result, Super Bakery implemented an activity based costing system whereby each