Running Head: Costing Methods Paper Costing Methods Paper Lavelle Haynes ACC/561 February 14, 2011 Professor Micheal Gaspar Super Bakery is a distinguished company created in 1990. The company has is a supplier of mineral, vitamin, and protein enriched doughnuts. The strategy applied by the company is job order cost method. Job costing is a product costing system when costs are accumulated by specific job orders and assigned to batches of products. In other words, manufacturing costs are assigned to specific job, specific customers, specific orders, specific projects, and specific contracts.
Job costing is preferable to small and medium-sized companies, such as professional services (e. g. medical, legal), advertising agencies, construction, shipbuilding, custom equipment/furniture manufacturing. Http://simplestudies. com/activity-based-costing_(abc). html The management of Super Bakery thought it was necessary to implement the activities of the ABC cost method. The concept of the method is to produce a costing system that a company allocates factory overhead costs to activity center (e. . bakery machine set ups, operating machines) and then uses activity cost drivers to allocate factory overhead costs to individual products or services. Http://simplestudies. com/activity-based-costing_(abc). html The previous strategy of the company did not produce positive gains or locate profit margins spread across activities of the company. The company was found twenty years ago and has only a 20% increase of production. The percentage requires an immediate reaction of change.
Super Bakery acts as a virtual company in which main functions are performed inside of the company. The company implemented cost activities such as manufacturing, warehousing, and shipping toward outside entities. The external production consists of a network of outside companies. Super Bakery reached the obstacle of controlling the cost of outsourced activities within the company. The management realized the wide variation of cost in regard to serving customers nationwide had to be marginalized.
The goal of the company becomes irrational if work capital and staff are minimum assets toward the company. Production is a factor if inner core controls work capital and legitimizes its staff. Furthermore, the management had to revitalize the notion that spreading cost across customer base rules out the costs produced within the company. Management had a realization that job order method for the company was not effective for making note of profit against the grains of activities within the company.
Customer orders of cost that equal to another are not effective to gain and create loss. The move to ABC method became apparent when order with high margins subsidized low margins. Management goal was to marginalize profit through the activities of production. The ABC models implemented cost of performed activities are identifiable within the business (manufacturing and sales). The company will benefit from the ABC method because the profit are tracked by each customer account in conjunction with performance of outsourced activities.
I agree with the company switching to a method that is designed to meet their needs. Activity based Costing method is an accounting strategy that assigns costs to activities based on their use of resources, rather than products, or services. This enables resources and other associated costs to be more accurately attributed to the products and the services which they use. Http://www. managers-net. com/activityBC. html ABC method does not change or eliminate costs; it provides detailed information about how cost is consumed.
The ABC method directly assigns costs to activities, it can be an extremely useful tool for anyone involved in process improvement and cost reduction program. Using ABC means that all the individual activities that are part of a process can be accurately cost. For example in manufacturing organizations it will be possible to accurately determine the cost of each activity involved. The previous strategy applied separated activity with internal and external entities, allowing the management to control all work flow.
The ABC method means that all the individual activities part of a process can be accurately cost. This is what Super Bakery needs to set the value of the company based on the activities of individual assets (management, staff, manufacturing and warehouse). The activity- based cost system allows the company to identify where high (and low) costs are being incurred and the cause. How can a company survive with a 20% growth rate in twenty year duration? The desire to change was required and ABC is the best cost system for Super Bakery.
The ABC method helps with future product planning and the cost of all activities associated with a product or service can be accurately determined before it is launched. This can help with determining pricing, and any associated expenditures of the company. The objective was to move from the concept of job cost system that the company mimicked. The notion of job order is a disadvantage to Super Bakery. The order cost of its customers was at a fixed cost. The problem exist as the orders with high margins subsidized low margins. Profit margins are not recognized by the cash flow produced by order.
A process cost system could be used by the company but will impose disadvantages. Process costing advantages include the ability for companies to create a cost for products where it is difficult to track cost flows for each item. For example, a company that produces baked goods will find it difficult to determine the cost for the packaged bakeries. The process cost system provides aid with this issue. Process costing is an accounting method that works best for companies producing homogeneous products such as the baked goods of Super Bakery.
The setback is creating by the ability to include costs not necessary to the manufacturing process. Additionally, process costing can make it difficult to cost partially completed goods. This can create fallacies in the company’s work-in-process account. http://www. ehow. com/facts_7160565_advantages-disadvantages-process-costing. html References- http://www. ehow. com/facts_7160565_advantages-disadvantages-process-costing. html http://www. managers-net. com/activityBC. html http://simplestudies. com/activity-based-costing_(abc). html