Activity Based Costing : Service Industry

The week four individual paper addresses the implementation of Activity Based Costing (ABC) by Super Bakery, Inc., a virtual corporation founded by Franco Harris. Specifically, management strategies, the reasoning behind an ABC system, and the alternatives of a job order cost system or a process order cost system are assessed for this enterprise.

Activity-based costing can be defined as the managers allocate costs depending on the quantity of resources a product or service consumed in the manufacture of goods and services. The activity based

The week four individual paper addresses the implementation of Activity Based Costing (ABC) by Super Bakery, Inc., a virtual corporation founded by Franco Harris. Specifically, management strategies, the reasoning behind an ABC system, and the alternatives of a job order cost system or a process order cost system are assessed for this enterprise.

In 1995 the Australian Society of CPAs initiated a major survey on ABC amongst Australian manufacturers. This survey, which was conducted by the University of Technology, Sydney, involved 213 firms covering all aspects of Australian manufacturing (Corrigan, 1996; Wood, 1996). This survey showed that 45 per cent of the surveyed firms had never considered adopting ABC (although 88 per cent of those surveyed acknowledged awareness of activity-based costing), 29 per cent were still in the process of considering adopting it, 14 per cent had considered and rejected it and only 12 per cent of the firms surveyed had actually implemented it. The highest adoption rates of ABC were found amongst the food, beverage and tobacco industry with 25 per cent of this group using this method.

Activity-based costing is a system of accounting that puts emphases on activities performed to produce products or services (Schneider, 2012). In this costing system every activity is assigned a cost (Schneider, 2012). The goal of activity-based costing is not to allot common costs to products but to measure and then price out all the resources used for activities that sustain the production and delivery of products and services to customers (Mazumder, 2007). Activity-based costing is a cost system that is useful in business because of the fact that it does account for the cost of the products, resources used to produce the product and delivery of the product.

Under an ABC system, the allocation of costs to products is achieved through at least four analytical steps. Firstly, costs are grouped into activity levels. Secondly, cost drivers are

Under a traditional system, overhead cost is allocated to an activity based on hours or rates for direct labor or machine usage. However, this approach does not clearly indicate how much overhead cost will be needed in order to complete a job through a particular function. ABC methodology is to be used as an alternative to traditional accounting where a business 's overhead costs (indirect costs such as electrical energy consumption for heating or cooling, or indirect cost associated with marketing) are allocated as a proportion of direct costs, to an activity. This approach is unsatisfactory because there can be cases where two activities could absorb the same direct costs

One of the best aspects of the way the time-driven ABC system was put into place at Kemps was how efficiently and accurately management determined the main issues with the current cost system and responded with appropriate and relevant solutions. For example, one of the greatest problems the company was facing was that many of its operating costs were spread out equally over a customer base that was growing more diverse and demanding more personalized and varied service, effectively cutting or potentially eliminating entirely Kemps’ profit margins for a product. Therefore,

The activity based costing (ABC) has the basic characteristic to seek to lower the misrepresentation generally occurred by the incorrect allotment of indirect cost acquired in traditional process (Stefano & Filho, 2013). Activity-based costing (ABC) is a costing methodology that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. However in 1980’s the hospitals used to use coding system for medical tariff. Under this, medical services were divided into three number code, but due to a lot of weaknesses in tariff method a lot of hospitals started using “Diagnosis Related Group” method under which instead of fixed tariff the cost of

3. Under the new activity-based costing (ABC) system, compute the indirect cost allocation rates for each of the three activities:

An organization costing system is a system that helps the management with the strategy planning while the system plays an important role in providing accurate cost information about the products and customers (Curtin, 2006). UPS utilizes the Activity-Based Costing (ABC) system. ABC assumes that activities cause costs and that cost objects create the demand for activities (Marx,

We will examine the given data from the case and compare the unit costs from the company’s current costing system (traditional costing) and from activity-based costing. We will also highlight other qualitative data in consideration with the numerical factors that may result to a significant change on our recommendation.

With this system each customer’s order cost the same amount to complete causing orders with high profit limits to subsidized orders with low profit limits making it difficult for Super Bakery to know the true cost for an order. The company changed to the activity-based costing (ABC) system allowing the managers the ability to recognize the cost and profit margins for each sale. The ABC system associates the costs with the activities allowing managers the opportunity to access a system that allocates overhead costs that uses multiple bases. Costs can be traced back to each individual’s account regardless of the product provider letting managers know which products are profitable and which ones are not. The traditional costing system allocates cost to departments or jobs instead of overhead cost pools. The traditional costing system makes it difficult to know which activity or product is making a profit.

It consists of weighting and combining the weights of the ten factors and to evaluate implementing ABC. The potential benefits of ABC can be analyzed in advance along two separate dimensions. And there are ten mediating factors (Pricing Diversity, Support Diversity, Common Processes, Cost Allocation, Growth of Indirect Costs, Pricing Freedom, Fixed Expense Ratio, Strategic Considerations, Cost Reduction Effort, Analysis Frequency) can guide management in determining the answers. The fist five factors (PD, SD, CP, CA, FG) based on the probability. The second dimension of the model seeks to establish decisions. lY axis potential for ABC due to cost distortion---PD.SD.CP.CA.FG lX axis proclivity to use cost information in decision---PF.FE.SC.CR.AF To start management must analyze and responses to two key questions: 1. For a given organization, is it likely that ABC will produce costs that are significantly different from those that are generated with conventional accounting, and does it seem likely that those costs will be "better"? 2. If information that is considered "better" is generated by the system, will the new information change the dependent decisions made by the management? After finish these questions managers of company can discuses the ten factors that support or reject implementation. Finally, the combined weighted scores are plotted as a point on one of the four quadrants of a graph.Plotting the Answers--- Use Contingency Grid Method The steps in the

1. Identify the flaws associated with the current method of assigning shipping and warehousing costs to Sharp’s products.