Running head: COSTING METHODS PAPER
Costing Methods Paper
University of Phoenix
November 27, 2013
Costing Methods Paper
Super Bakery, Inc. was founded by Franco Harris, formerly of the Pittsburgh Steelers, in 1990. The corporation supplies healthy, vitamin enriched doughnuts and other baked goods, out of an initial desire to make a difference in the institutional food market by targeting school systems nationwide (Kimmel, 2009). While, the company experiences positive growth since its inception, Super Bakery is at the point where it needs to explore a costing system that can establish a more accurate ...view middle of the document...
There are disadvantages, for making the costing method change however. Since, Super Bakery outsourced its manufacturing, shipping, and warehousing components, implementation of a change becomes more complex to navigate with its business partners. Additionally, an activity-based-costing system can be costly to use because of the time and research invested to identify all key cost drivers, for example. Conversely, ABC greatly improves a company’s control of its’ overhead costs. Given the enhanced product costing, Super Bakery is better positioned to set the appropriate selling price for its products, thus optimizing revenue potential. After much deliberation, Super Bakery decides to move forward with implementation because the advantages of the company well outweigh the disadvantages.
Installing an ABC system will enable Super Bakery to identify its’ costs and appropriately allocate overhead costs. Super Bakery should be able to determine the correct activity cost pools by identifying the appropriate activities associated with the related events that drive the costs. In addition, the corporation has embraced a philosophy of aggressive automation given its outsourced manufacturing components. Super Bakery should be able to collaborate with its outsourcing partners to implement an activity-based method, based on a process costing system that will enable Super Bakery to allocate overhead costs.
Using the more traditional costing method can distort costs by overstating or understating unit costs, which is a problem that can affect company profits. Super Bakery is positioned to lose potential sales by improperly overstating unit costs that influences the price of the products based on distorted unit costs. Customers could perceive negatively the products based on overstated prices and decide not to purchase the products. Conversely, Super Bakery could lose potential revenues, which also impacts the corporation’s financial statements, based on understated unit costs of the products influencing the product prices as well.
Do you agree with their reasoning? Would a job order cost system or a process order cost...