Costing Methods for a Virtual Corporation

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According to Davis & Darling (1996), Super Bakery Inc is a virtual corporation created for the purpose of exemplifying the Activity Based Costing (also known as ABC) method. The most basic, strategic functions of the corporation are performed from within the company, while other activities, such as sales, storage and shipping, are handled by various external companies, through outsourcing. Super Bakery controls the workflow in this system, their main goal being to achieve maximum value at low investment levels. However, achieving minimum cost level is not that easy, given the outsourcing of the aforementioned services. The main challenge Super Bakery Inc has to face is to control the costs incurred from the external companies. Seemingly, the company managed to succeed controlling costs, since the sales have grown at an average annual rate of 20%.  Nevertheless, managers noticed that the costs are not easily identifiable and cannot be assigned to each order; therefore, they recognized the need for implementing a new system for costing that would provide more accurate data regarding costs and profit margins for each sale.

The purpose of this paper is to provide answers to three significant questions, which are relevant to understanding Super Bakery’s successful costing methods and execution. The first question refers to the strategies initially exploited by the company in order to maintain an average sales growth of approximately 20%. This performance was achieved by using a very simple technique: while all strategic, core decisions were made within the company, all activities (i.e. sales, transportation, warehousing) were conducted with the help of a network of external companies. Experts (Christie & Levary, 1998) claim that such strategies are difficult to implement, although they are very cost effective. They rely on a series of factors, such as mutual trust and communication.

The second question to answer is why Super Bakery Inc’s management felt it was necessary to implement an Activity Based Costing system. The answer lies within the company’s desire to keep track of the costs incurred for each order. Their current system did not allow such a high accuracy, and management observed high variation between the costs of orders, depending on a variety of factors, such as customer location and order size. In fact, they observed that they did not have full control over outsourcing activities and that, in total, highly profitable orders balanced orders with a smaller profit margin. Therefore, in order to have exact data on each order, the cost incurred for sale, and the profitability margins, they decided the best costing system was ABC. Additionally, with a more accurate cost of each order, the prices would improve, attracting more customers.

The third question concerning the application and implementation of ABC in Super Bakery Inc refers to the main difference between the Activity Based Costing system employed in this company and the ABC systems used by other manufacturers. Given the data in the case study from Davis & Darling (1996), Super Bakery Inc used ABC in order to have a better understanding of the variation of costs and profit margins on individual orders. The costing system focused on the overall cost of each order, not on the costs of individual activities. This ABC system is different from ABC methods used by other manufacturers, as they prefer the conventional ABC, that focuses on individual activities, such as manufacturing, packaging, shipping, and so on, rather than on individual orders.

To come to a conclusion, virtual corporations are more advantageous, as their activities are more cost effective (les personnel expenses, investments in fixed assets and working capital), however, without an effective cost system that could keep track of the cost of each order, achieving a certain level of profitability may be challenging. More thorough control certainly leads to more sales and higher annual growth rates for the company.

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