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Super Bakery Inc., ABC, Costing Methods

Resource: Feature Story on Super Bakery Inc.

Read the attached feature story on Super Bakery Inc.

1. What strategies did the management of Super Bakery, Inc. use?
2. 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.
3. Would a job order cost system or a process order cost system work for Super Bakery. Why or why not?

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Super Bakery, Inc., created in 1990 by former Pittsburgh Steelers' running back Franco Harris, is a nationwide supplier of mineral-, vitamin-, and protein-enriched doughnuts and other baked goods to the institutional food market, primarily school systems. Super Bakery is a virtual corporation, in which only the core, strategic functions of the business are performed inside the company. The remaining activities?selling, manufacturing, warehousing, and shipping?are outsourced to a network of external companies. Super Bakery draws these cooperating companies together and organizes the workflow. The goal is to add maximum value to the company while making the minimum investment in permanent staff, fixed assets, and working capital. The results are notable: Super Bakery's sales have grown at an average annual rate of approximately 20% during most of its existence. One of Super Bakery's challenges has been to control the cost of the outsourced activities. Management suspected a wide variation in the cost of serving customers in different parts of the country. Yet its traditional costing methods were spreading costs over the entire customer base. Each customer's order appeared to cost the same amount to complete. In actuality, orders with high profit margins were subsidizing orders with low profit margins. Super Bakery desired a system that would more accurately assign the costs of each order. With such a system, pricing could be improved. The company looked at and eventually changed to a system that could identify the costs associate with the activities performed in the business?manufacturing, sales, warehousing, and shipping. The new activity-based costing system showed that the costs and profit margins on each sale vary significantly. Super Bakery is now able to track the profitability of each customer's account and the performance of outsourced activities. This doughnut maker, as a result, even knows the cost of the doughnut holes!

Source: Based on Tom R. V. Davis and
Bruce L. Darling, "ABC in a Virtual Corporation,"
Management Accounting (October 1996), pp. 18-26.

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1. What strategies did the management of Super Bakery, Inc. use?

Super Bakery used a decentralized system to coordinate a network of providers. Its challenge has been to control costs. Under the old system, the cost-per-serving was spread across all the units uniformly even though they suspected that costs varied across the country. The pricing strategy did not differentiate between small and large orders and so the profitability of the orders varied considerably. They relied on just asking everyone to keep costs down and spreading costs evenly across all sales making the cost of each order uniform.

2. 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.

Super Bakery's management suspected that costs were not the same for each order. While it makes sense the costs in rural Iowa would not be the same as downtown Atlanta, the detail shared in the case story that makes it clear that ABC is needed is the differential size of the orders. Baked goods are batch goods. That is, they are made, cooked, and wrapped in batches because they are perishable and so ...

Solution Summary

Your tutorial is 752 words with two references and discusses why activity based costing was considered, how it changed the firm's prospects, and why they should use job costing to account for their product costs.

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