ACCT 521 Week 4 Discussion Board Forum 2 Example

Discussion Board Forum 2: Process Costing and Activity-Based Costing

ACCT 521 Advanced Cost Accounting, Discussion Board Forum 2

Thread by [Student Name]

The bakery, its figures and the classmates are composites; the textbook and the research cited are real.

Golden Crust Bakery produces about 1.2 million pounds of standard bread a year in continuous runs and fills roughly 2,400 custom orders for restaurants, ranging from 40 to 1,500 pounds. Overhead of $1.44 million a year is applied at a plantwide rate of $1.00 per pound. Under that rate, a 60-pound custom order of specialty rolls carries $60 of overhead and appears to earn a healthy margin at its $210 price. The owners have been growing the custom line because it seems to earn more per pound than the standard bread, and this thread tests whether that belief survives a closer look at what the orders actually consume.

Lanen et al. (2017) explain that activity-based costing assigns overhead to activities and then to products according to how much of each activity they use. At Golden Crust, four activities drive most overhead: mixing and baking ($720,000, driven by pounds, $0.50 per pound), setups ($240,000 for 3,000 setups, $80 each), order handling ($240,000 for 3,000 orders, $80 each) and delivery ($240,000 for 6,000 stops, $40 each).

Under one rate, the small order looked profitable; under activity costing, its overhead alone exceeds its $210 price. The large order, by contrast, has been overcosted. Every custom order, whatever its size, needs one setup, one round of order handling and two delivery stops, so the per-order activities cost $240 regardless of weight, and that fixed amount overwhelms small orders.

Process costing remains the right method for the standard loaves, which move through identical mixing, proofing and baking steps, so equivalent units and a cost per pound describe them accurately. The custom orders need activity-based treatment because they consume setups, handling and delivery in ways unrelated to weight. In their case study of a distribution company, Everaert et al. (2008) showed that several of its logistics activities varied with more than one order characteristic, and that time-driven ABC, using time equations, captured their variation more accurately. Golden Crust's delivery cost, which depends on distance and order size, may need the same treatment. A time equation for delivery could add minutes for each stop beyond the first and for orders above a set weight, giving a cost that tracks how drivers actually spend their day.

Reply to Melissa

Melissa, you worried that an activity-based system would cost Golden Crust more to run than it would save, and that is a fair concern for a small company. Traditional ABC can require interviews and surveys every period, which is expensive to maintain and quickly goes out of date. Everaert et al. (2008) describe how time-driven ABC reduces that burden by pricing each minute of available capacity and estimating how long each activity lasts, then updating the model as procedures change. For Golden Crust, four activities and a few time equations could live in a spreadsheet the controller updates quarterly. The first analysis would answer the most important question, which custom orders lose money, and later updates could be less frequent. I would suggest starting with the custom line only, since the standard loaves are already costed well by the process system. That keeps the first project small enough to finish in a quarter.

Reply to Jason

Jason, you proposed simply raising prices on all custom orders to cover their true costs, and the activity analysis supports a more targeted version of that idea. Lanen et al. (2017) note that activity information is most useful when it changes decisions, not just reported costs. Because Golden Crust's overhead for a custom order is mostly fixed per order, about $240 for setup, handling and delivery, a uniform price increase would overcharge large orders and still leave small ones unprofitable. A minimum order size, or a per-order fee of around $240 plus a per-pound price, would reflect how costs actually arise. Many food distributors already use delivery minimums for the same reason. Restaurants placing small orders could still buy, but they would pay for the activities they cause. That approach also protects the large accounts the plantwide rate had been overcharging, which the bakery may have been losing to competitors without knowing why.

References

Everaert, P., Bruggeman, W., Sarens, G., Anderson, S. R., & Levant, Y. (2008). Cost modeling in logistics using time-driven ABC: Experiences from a wholesaler. International Journal of Physical Distribution & Logistics Management, 38(3), 172-191. https://doi.org/10.1108/09600030810866977

Lanen, W. N., Anderson, S. W., & Maher, M. W. (2017). Fundamentals of cost accounting (5th ed.). McGraw-Hill Education.