ABC Accounting is the only "real" function at this donut maker, which in a outsources almost every activity. Virtual Corporation Super Bakery, Inc, has been developed on the lines of a virtu. al corporation. This company which was formed by former Pittsburgh Steelers' running back Franco Harris in 1963, is a sup plier of donuts and other baked goods to the institutional food market. For the past 12 years, it has been gaining market share and establishing a firm foothold in the highly competitive institu- tional baked goods market Instead of creating a large multifunctional organization to Bominister the business, the management of Super Bakery outsourced selling to a network of Ddependent brokers and con- tracted out manufacturing ware- housing and shipping Four regional sales manager guide BY TIM R V. DAVIS AND BRUCE L CARING. CMA and assist the independent bre- bers. A small office staff processes orders and handles credit Certificate of Merit and collections. Super Bakery handles strategic planning. marketing. R& D. and finance accounting in house, and Fran- n a virtual corporation only the core, strategic functions of co Harris hired a master baker to develop aew products. The he business are performed inside the company. The company also purchases ingredients and formulates and pro remaining support activities are outsourced to a network dures its own dough. of external companies that specialize in each function. These Super Bakery's major challenge has been to courdinate firms form fianctional alliances to manufacture products or and control the various functional activities performed out- provide services for customers. The virtual corporation posi- side the company by brokers and contractors. This challenge tions itself at the center of these relationships and serves as siste of a twofold problem of controlling the quality of ser the catalyst that draws these cooperating companies together vice provided to customers and controlling the cost of these and organizes how the work will flow. The goal is to extract pervices. Managers and employees at Super Bakery devel the maximum value-added from these partnerships while ped a performance reporting and activity based costing my making the minimum investment in permanent staff, fixed tem that helped the company maintain control over cut- assets, and working capital." sourced functions. IN IMAGINEIN ACCOUNTING OCTOBER 1900 produced with permission of the copyright owner. Further reproduction prohibited without permission.SUPER BAKERY'S STRATEGIES management opts to outsource business functions, it can cre- ate serious difficulties. The loss of control of these functions When Super Bakery entered the institutional food busi- and the problems of coordinating activities need to be connid- neem in the early '80s, the senior managers knew they faced cred enrefially The service aspects of a manufacturing huti an uphill battle. The market was mature with little growth ness sometimes may be more important, strategically than in the baked goods segment. Members of the management the production aspects. Super Bakery was able to control team, however, had extensive experience in the institutional product quality by supplying the dough, which contained its food business, Marketing strategies and policies were devel- unique product formulations, in manufacturers. The contract- oped that followed standard industry practices closely. ed bakeries simply add water to the mix and follow the bak- The first four years were disappointing for the company. my instructions. Penetrating the institutional food market proved more chal- The service elements of the business presented greater enging than management had thought, probably because variability and risk. Management carefully researched which Super Bakery followed industry practions too closely Cus terrice activities were most important to customers before tomers were not given any reason to buy from Super Bakery When management started questioning industry practices and began developing unique strategies and tactics, saks hogan to take off. First, Super Bakery targeted the school system segment of the institutional food market. which has been in a state of ER BAKERY'S CUSTOMER SERV . Convenient decline because of funding pressures and increasing govern- SUPER ander ment health requirements. Management felt that this cus- scheduling tomer segment was poorly served. The company pioneered low calorie, vitamin enriched donuts that tasted delicious Pricing and mat USDA guidelines," This strategy helped Super Bak- ery to grow annual sales while the sales of conventional, support high-fat donuts were declining. Second. Super Bakery avoided the local market restrigs Warmhousing and pornga order Mikey lions of most fresh baked goods by refrigerating the product, vacuum sealing it, and distributing it nationally, a strategy that allowed Super Bakery to build a national presence in delivery what was formerly a fragmented industry Third, Super Bakery developed numerous ways of serving Accurate billing and supporting its customers such is distributors and achool systems They ireluded helping customers obtain lower prices by acquiring government-supported commodities four, buster, and fruit), cooperating with noncompeting sup- doriding which functions to contract out. Super Bakery's pliers by providing complete prepackaged meals to schools. product is just one component of the mix of benefits that are and helping distributors reduce inventory carrying coats and provided to customers. There are other important services for wold stocknuts through reliable, just-in-time delivery. customers love figure), most of which are part of the order Fourth, Super Bakery reduced capital investment and management process, The order management cycle had the overhead capense by contracting out majer functions of the biggest influence on customer satisfaction. Management business, Super Bakery does not manufacture, sell, or dis- believed that all of these activities did not have to be per tribute its products. It is a virtual corporation. formed by Super Bakery, but the company had to be able to These strategies have helped Super Bakery grow annual control and coordinate these services saks at an average rate of 204 to 10'# for the past eight Upatream activities tend to drive the downstream artivis years In 1904, sales reached $8.6 million with a staff of nine ties in a process. Upstream activities much as order entry full time employees-a very high rate of productivity pir pricing, and scheduling drive downstream activities such an employee, Operating profits have been twice the industry production, onder picking, packing. and delivery Manage- average, and the company also enjoys a very high return on ment wanted to control the upstream planning activities as equity and return on not meets. There superior levels of per- well as the coordination of each customer's order. Manage- formance can be expected in companies that reduce their ment also wanted to control billing and collections. Is decided investment in payroll expenses and fixed assets, but there that selling production, warehousing, and shipping could be also are risks in implementing the lean structure of a virtual quiracted out if management retained overall control over corporation. the planning and trucking of these activities in the order management process. BREAKING OUT SERVICE ACTIVITIES Relationships with outside brokers, manufacturers, and IN A VIRTUAL CORPORATION trucking companies could make or brook the company because they stand between the company and its customers. The first decision a virtual corporation's managers need in The brokers in the different parts of the country would have make is which aspects of corporate activity must be per. to do an offective job of promoting and selling the company's formed in house and which jobs can be contracted out. When products to distributors and school systems, The variousTable 1. SUPER BAKERY'S NONFINANCIAL PERFORMANCE MEASURES Survice Activity Martorn |Number Oil Imported By Order entry spotd Customer Telephone complaints, customer survey Order accuracy Correct orders Cintomer Telephone callbacks, [computer wrecked) Order fill rate Complete ardare Curtomer pervica Customer groot packing list (computer tracked) On-time delivery Hours enrightandy tron Common comes promised delivery data Accuracy of shipments Correct shipmanis Customer service Custom of order, pucking hat jcamputer tracindi Product quality Custommar product Customer, HBO Telephone complaints, customer survey, plant inspections Tolal order filling cycle time Days from under Customer service Order entry date to delivery confirmation fece al to delivery Damaged shipments customer, mecountry Incorrect billing Pricing errors curboror Customer invoices billing complyish independent bakeries that manufactured the products would processes is turned over to the contractor have to meet Super Bakery's quality standards. The trucking Most of the activities in the order-filling cycle are commu- companies would have to meet on-time shipping and delivery nicaled by fax and telephone; others are coordinated by on requirements. Some of those concerns were addressed by line modem. Front-line, customer service employees at Super clarifying the performance standards with contractors in Bakery take product orders from distributors and school gys- painstaking detail. Clearly defined requirements were built tems; quote prices; schedule production at the independent into contracts with outside vendors, but discrepancies often bakeries in New York, Indiana, and California; and set deliv still occur between what is agreed to on paper and day to- ery dates. Using an activity-based costing (ADC) system, the day operations. bakery company constructed a detailed breakdown of the Companies run a risk when they let outside brokers or coats incurred in filling each customer's order common carriers interact with customers. Most external con- tractors will not sign service guarantees, and they usually IMPLEMENTING AN ACTIVITY-BASED refuse to pay penalties or fines for failing to meet service COSTING SYSTEM atandarda. The key issue from a service perspective is what influence the contractor is having on the customer That in The wide variation in the cust of serving different cus- why a constant stream of feedback from the field is essential tomers was a major macern, For example, freight real- var- for evaluating performance. and for each customer depending on the size of the order and the shipping distance, The contracted cast for manufacturing CREATING A PERFORMANCE REPORTING SYSTEM the donuts was bigber for the plant in California than the plants in New York and Indiana. There also were numerous Management wanted a performance reporting system that other variations in the cost of serving different customers. would provide a balance of nonfinancial and financial mea- The company was faced with the choice of spreading product sures. The nonfinancial measures were needed to track cus- and service costs over the entire customer base and charging tomer service and satisfaction level, and the financial mon- uniform prices or assigning the exact quet of processing each sures were needed to track the cost of filling orders and order and building these costs into the price charged to each serving customers The core process that most influenced customer satletac- In most firms, a standard costing system is used to all- tion was the order management cycle. For Super Bakery, cale costs to products and to price customere" orders, Stan- these steps included order entry, credit clearance, coating, dard costs are the agreed target coat of direct labor and pricing, scheduling, procurement, manufacturing, shipping. motorinis that go into making products. They also include bulling, and collection. When some of these functions are out the overhead operating expenses, such as selling, advertising. sourced, it is important to retain control over the administra- warehousing, shipping, and administration, which also are tive process that links these interdependent fanctions togeth- expended in servicing customer accounts. Under a standard er. Super Bakery developed nonfinancial measures of these costing system, these overhead expenses are allocated to processes that reflected customers' concerns (Table 1). products and spread over the entire customer base. Each cus- Some of these measures needed to be collected and tracked lomer's order is assumed to cost the same average amount to by Super Bakery's staff; others were collected from customers or contractors. To keep track of these performance measures, The fallney of the standard costing system at many compe a relational database was created at Super Bakery, One of ales, induding Super Bakery, is that very low customers' the advantages of contracting out functions is that managers orders consume the same amount of resources At Super no longer need to worry about measuring processes. They Bakery, the profit on each sale varied significantly. Assigning only need to measure outcomes. The problem of managing costs accurately to each account would allow the company to 22 MANAGEMENT ACCOUNTING OCTOBER 1950assess the profitability of different cus. comers. Making customers pay for Someone in your company is still typing what they received is also a fairer arrangement. Few companies rocover G/L numbers into a spreadsheet. the oxnot cost and expendes of serving customers in the sales price charged. In many businesses, profitable accounts subsidize unprofitable ones, and management is none the wiser. In order to track cuts mare closely, man- agemont made the investment in a more sophisticated information and hecounting system The management of Super Bakery decided to install a detailed ABC sys. tem, first, because it would allow man- agemient to track the profitability of each customer's account and, second, because it would allow manageusent to track the performance of outside ean- tractors more closely. One of the main differences between Super Bakery's ARC system and other manufacturers' ABC systems in that the main focus is placed on capturing Stop it ! costs by customer order rather than by product, Overhead service expense tend to be high and variable, while It is a tedious error prone 19 also provides tools to contracted manufacturing costs were activity. And entirely unnecessary explore your G/L, drill down But, you say, spreadsheets are the multiple tiers to your G/L With must ABC systemus, the con- sumption of custs is either directly bea place to do financial reporting. vansactions, prepare consolidations recorded an eats occur (e.g, specific F9 seamlessly integrates and more. freight charges) or recorded indirectly your G/L with your spreadsheet F9 even lets you create and by means of a cost driver, When a cust Excel, Lotus 1-2-3, or Quattro Proj: edit budgets in a spreadsheet driver is used as the basis for assign- no macros, no imports, no exports, and write them back to the G/L! ing costa, management still is using an allocation method, It is an estimated With 19 you can create reports of meet, not the actual cnet. Well-chosen any size or complexity, and never cout drivers, however usually are super type another G/L balance into a rior to traditional standard cast hanes spreadsheet. for allocating costs, such as percent of F9 is the perfect tool for F9 direct labor or percent of total sales For instance, under a standard cust financial reporting. Create a single system many companies allocate order period income statement. With a "the future of handling charges on a percent of sales click of the mouse, you can go toa basis. In other words, the greater the multi period comparative income financial reporting" value of the sales ander, the higher the order handling costs that will be statement or any financial report 800-663-8663 x 332 charged to the customer. The problem you can imagine. And with a little with this standard cost accounting more effort, you can create a P9 works all these systems: practice Is that the amount of time and complete EIS, with buttons, and expone spent proceeding an order usa- "hot Charts" that change Cups ally in the same whether the order in automatically when the data does. for 200 or 2,000 cases The cost driver is not the number of cases ordered but And the best part is, if you know was/Uvium] the number of separate sales orders how to use a spreadsheet, you Intend that have to be processed. In this age already know 95% of what you of just-in-time delivery, many compa- need to know in order to use F9. F9 Universal will work aid my swing nice would prefer to place a lot of small orders rather than book one large Code No. 8throughout the United States, and these interest charges for carrying a particular brokers also represent a variety of noncom- customer's account. There interest charges, peting companies and products. The inde based on Super Bakery's cost of capital, are pendent sales brokers have looser tice to figured into the price that is quoted to eus- the company than any of the outside can- tomers for future orders. If the customer tractors. The regional sales managers demonstrates that it can pay within Super mainly judge the performance of brokers from the feedback they receive in sales reports of orders booked. The brokers, who 2 Bakery's net 30 terms, these charges are dropped. Brokers also have access to customers' are on straight commission, sometimes use files and can see which customers have not free samples, price discounts, and advertis- paid their last invoice. They know that new ng allowances to push deals through with orders will not be accepted until previous distributors. These incentives are supposed invoices have been paid. Brokers do not to be used to increase the size of customers' receive commission checks until customers orders so that the profit from the orders have paid their involcos. For this reason, bro exceeds the additional selling expense. kers have an incentive to follow up with Super Bakery's regional sales managers overdue castomers, which reduces Super look carefully at the east of servicing each Bakery's collections' problems. account and whether to approve brokers' In some instances, delays in the receipt of requests for promotional allowances. They Franco Harris payments occur because school systems only are able to access an electronic file contain- cut checks on a particular day each mouth. If ing the volume and value of each customer's sales, past pro- this day fe miaood, vendors must wait until the same day the motional allowances, and servicing costs (credit history, ship- meat month to get paid. Here It is critical to get in step with ping costs, etc. ). On some occasions, promotional allowances the customer's billing and payables cycle. For the larger requested by brokers have exceeded the contribution margin nocounts, Super Bakery's front-line service employees place a on the scomuni. The management information and activity- call to the customer's payables clerk a few days prior to the hased cooling systems are used to evaluate the profitability day when checks are printed to make sure the invoice is of each account and whether to approve a broker's requests accurate and can be paid on time. for promotional allowances. Shipping performance and freight costs are another area of VIRTUAL ADVANTAGES critical importance. There is a tremendous amount of varia- Lion in the quality and cost of service provided by different During the rapid growth of Super Bakery, management's trucking companies. Over the years, Super Bakery has used major concern has been making sure that staff and expenses 12 different common carriers. Today it uses three companies do not grow more rapidly than males revenues and profits. that offer the company the best rates and service in different For Super Bakery the advantage of contracting out manufoe parts of the country. turing is that it obviates the need for investment in plant, Most common carriers have regularly scheduled routes equipment, and factory personnel. It also eliminates concerns and stops in particular locations. For instance, they may of capacity utilization and meeting minimum brenkevon pro- deliver in Raleigh, N.C., on Tuesdays, and Hartford, Conn., duction levels on Thursdays. Many common carriers will deliver full trailer Arm's-length relationships with external contractors may loads any day of the week, but they will not deliver less than sometimes give companies greater control over the perfor. trailer loads, unless it is a scheduled stop. without charging a mance and coat of certain functions than when there func- price premium, A lot of Super Bakery's business consists of lions are handled internally. Moreover, contracted costs often less than trailer load shipments. Super Bakery must consoli- are fixed rather than variable. If the costs exceed a set date shipments to particular locations to make up full trailer amount, the contractor must shoorb the lose. Management loads or conform to the common carriers' schedule for less can withhold payment of invoices from contractors who than trailer load shipments. Management and employees caceed agreed prices for manufacturing, warehousing, or must monitor the shipping performance and freight cuts of shipping. Nevertheless, when sales, manufacturing, and dis- the different carriers carefully. They need to make sure that tribution are outsourced, the performance of brokers and they are not overcharged for different shipments. Super Bak contractors must be monitored. A well-designed performance ery uses historical customer information to calculate the reporting and costing system is needed to evaluate their per- exact cost of transporting a specified number and type of formance and control expenses. The systems put in place at donuts to a particular location. In this way, actual freight can Super Bakery provide useful guidelines for other virtual be built into the price charged to the customer for each order. corporations Any variances in these chipping charges are taken up with the common carriers Tim RV. Davis is professor of management and director of international Another instance where Super Bakery uses historical cost Bruen L. Darling, CMA, is the controller of Super Bakery, Inc, and information is in the control of overdue receivables. As shown Prestige American Foods, Cleveland office He is a member of Clevland in Table 2, Super Bakery keeps extensive information on East Chapter, through which this article way schm the. each customer's payment history and the average number of days invoices are past due. This information is used to assessEvaluate the case study provided (see document titled Costing Methods listed above) and write a paper between 1,000 and 1,700 words addressing the following questions. Your answers should apply to the company and content incorporated with the case study. 'I. You are a recent MBA graduate and were hired by the company as a business consultant. Your objective is to identify areas for improvement. Present three business recommendations to management and state how this will impact the company's financial statements. 2. Why did company management think it was necessary to install an ABC system? Do you agree with their reasoning? Explain your answer. 3. Evaluate and recommend changes to the company's cost drivers. State how this influences cost accounting results and business decision capabilities. 4. Is job order or process costing a viable option for the company. Why or why not