Finance Activity-Based Costing at Super Bakery

The management at Super Bakery has developed a very lean business model which is an efficient use of capital. The model is based on the concept of a virtual organization. In this business model the firm owns very few assets that are required for production; by outsourcing to third parties the firm does not need to make the investments that are traditionally associated with production companies. Furthermore, as Super Bakery does not run the facilities there are fewer considerations for ongoing operations. The virtual organization strategy is very effective and leaves the firm in a position which facilitates flexibility and has helped with the firms' ability to increase capacity, which has averaged 20% a year. If the firm had been a traditional organization with its own assets, increasing capacity may have been more difficult and required further investment. The firm has been successful; to remain successful there was a decision made by the firm to move to a system of activity-based costing.

The firms' management has been astute in their capital management, indicating a good financial awareness. It is logical that the same degree of astuteness is applied to the everyday management of operations, to ensure efficiency. The firm has moved from overhead or absorption costing to the use of activity-based costing (ABC). To understand why the management choose to move to ABC it is necessary to look at the basis of the alternate approach. Overhead...

The basis of allocation may vary, depending on a number of factors. For example, the costs may be allocated proportionally based on the percentage of sales each product accounts for, or based on the time taken to manufacture or manage the products. This was seen as a fair way of allocating the costs which are incurred regardless of the level of production or sales (Drury, 2011, p78). The approach is fairly simple, and different types of overhead may be allocated in different ways. When looking at management of costs the problem with absorption costing it that it may not always accurately reflect the way costs are actually incurred. There is the potential for costs to be allocated to products where they are not incurred. If doughnuts make up 50% of the sales and overheads are allocated on a 50% basis, it is assumed that the doughnuts are using 50% of the overheads. However, if they only take a short amount of time to produce, the allocation of the costs may not reflect the real use of the overhead resources. There is also the potential for under or over absorption (Drury, 2011, p92).
The benefit of activity-based costing is the ability to increase transparency by assessing the real costs associated with each product unit, or each customer. Instead of making assumption regarding the costs activity-based costing breaks down the different processes for…