Super Bakery’s Costing Methods Essay Example

right choice for Super Bakery, it is important to understand how overhead is allocated with ABC. “ABC allocates overhead to multiple activity cost pools, and it then assigns the activity cost pools to products and services by means of cost drivers” (Kimmel, 2009, p. 267). There are four steps in ABC.

The first would be to categorize the different activities into which overhead is to be assigned. In this step, it is determined how much overhead is to be assigned to each cost pool, or category of activity. Step two, would be to identify the cost drivers, which is determined by how much activity occurs within each cost pool. Step 3, would be to compute the overhead rates. This is done by dividing the expected cost drivers per activity by the estimated overhead. Finally, overhead costs are assigned.

To do this, the expected use of cost drivers for each product must be determined, then that number multiplied the overhead rates determined in Step 3. Because of the virtual nature of Super Bakery, all different outsourced activities would be easy to categorize into different activity pools. For this reason ABC is an appropriate costing method for this type of organization. Job order costing and process order costing take a more general approach to allocating costs, which used only one single estimated overhead rate for the year.

This was a process that Super Bakery previously used. In job order costing, direct labor cost was the primary activity, whereas machine hours were the primary activity in process order costing. Even though companies still exist where direct labor and machine hours are still the primary activity,

in which either costing methods would be appropriate, more modern company structures find that ABC is more appropriate because there are many other activities that factor into the company’s overhead.

With ABC, Super Bakery could more accurately assign overhead costs to their different products, and because of this they can better strategize. It also allows them to have better control of their overhead costs by being able to trace them to the different activities. The most important benefit of ABC is the ability to make better management decisions, such as pricing, continuation, or elimination of a product line. Better management decisions are all made in an effort to increase profitability levels, which is the bottom line of most companies.