Management of Super Bakery, Inc. used two main aspects of strategy that made the company’s operations successful and efficient. Firstly, from the perspective of sales, Super Bakery’s consumer focus was a key part of the prosperous business. By being a supplier to large institutional consumers, such as schools, the company ensured high and stable demand. In turn, this enabled the management to predict sales more accurately and allowed for targeted and controlled marketing strategies. Secondly, from the perspective of costs, the main organizational approach was that of a virtual corporation.
It means that Super Bakery outsourced all functions except for its core operations. Third-party vendors performed selling, warehousing, and logistics. As the result, Super Bakery managed to reduce administrative and distribution expenses, including staff costs and depreciation of fixed assets (Davis & Darling, 1996). Moreover, the quality of outsourced activities was high, because of experience and specialization of external companies.
Were all of these functions performed in the house, the use of the company’s resources would be far less efficient. The company would need additional staff, inventory, and equipment, as well as increased level of working capital to make these functions work. Besides, by reducing the expenses, Super Bakery was able to concentrate more on its core business and development. The management of Super Bakery, Inc. employed two main strategies: the focus on institutional customers and the virtual corporation approach.
Nevertheless, after the company implemented successful strategies, there still were areas to improve. Super Bakery’s management needed to change costing system, because traditional costing led to misinterpretation of financial information. For instance, overheads allocation per traditional approach caused the even distribution of costs between customers. Consequently, gross margins of each order appeared “smoothed”, and so financial information on profitability was misleading for the management. As mentioned, Super Bakery’s strategic approach of virtual corporation requires the usage of different outsourced activities.
The volume and cost of activities used in business varies by region, customer, and individual order. In these circumstances, ideal costing system must be able to distinguish the volume of outsourced activities used in each order and allocate them accordingly. That is why activity based costing perfectly suits the needs of the company.
Apart from ABC, job order cost system or process cost system could be used in Super Bakery, Inc. Job order cost system is more useful where the business deals in a variety of products or services. This system accumulates cost data by different product types (or “jobs”), and controllers use consolidated information to determine cost per unit of each product. It allows monitoring of profitability of each product type (Kimmel, Weygandt, & Kieso, 2009).
On the other hand, this system is inappropriate for Super Bakery as costs of different types of doughnuts are almost equal. Process order cost system, though, traces costs to elements such as materials, labor, and overheads, which may be more applicable in the case of Super Bakery. For instance, it could be applied to identify costs of separate processes, such as manufacturing, warehousing, and shipping.
However, process order cost system implies overheads allocation by predetermined rates. Such allocation could have caused transfer of costs between orders and customers, and therefore given misleading results to the management team. This is exactly the problem that Super Bakery tried to avoid by switching to another cost system. Therefore, activity based costing is the most successful system that satisfies the requirements of Super Bakery, Inc.
References
Davis, T., Darling, B. (1996). ABC in a Virtual Corporation. Management Accounting, 74(9), 18-26.
Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2009). Accounting: Tools for business decision making (3rd ed., pp. 864-911). Hoboken, NJ: John Wiley & Sons.