Activity based costing for starbucks

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Activity based costing for starbucks

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Overhead Costs ; Product Costing Activity-based costing ABC is an accounting method that allows businesses to gather data about their operating costs. Costs are assigned to specific activities—planning, engineering, or manufacturing—and then the activities are associated with different products or services.

In this way, the ABC method enables a business to decide which products, services, and resources are increasing their profitability, and which are contributing to losses. Managers are then able to generate data to create a better budget and gain a greater overall understanding of the expenses that are required to keep the company running smoothly.

Generally, activity-based costing is most effective when used over a long period of time. Traditional cost accounting methods were designed for the companies operating in the early days of the 20th Century, a time when direct labor and materials were the two largest costs associated with producing goods and services.

Activity-based costing: Starbucks Company's case Essay

There was little automation at the time and overhead costs were very small as a percentage of total costs. All this was changing by the middle of the century. Automation was being incorporated into all businesses and overhead costs rose as the support services needed to design and manage this automation were removed from the production floor.

Yet traditional cost accounting methods stayed in place. Owners continued to measure primarily the costs of direct labor and materials; they allocated overhead costs somewhat arbitrarily. As overhead costs grew as a share of total costs, the distortions that this method introduced also grew.

Kaplan was among the first to articulate a need for a more sophisticated system with which to more accurately allocate costs directly to the goods and services produced by that business.

ABC is based on the principle that the majority of business activities support the production and delivery of goods and services. Therefore, in order to get a true picture of the cost of producing a good or service, one must allocate the costs of all business activity to specific products and services.

The ABC method does this by assigning factory and corporate overhead, as well as other indirect resource costs, to activity categories. Then, an assessment is made as to how much overhead each product, product line, or service consumes. In this way, according to Professor Kaplan, in an article he wrote for The CPA Journal in"ABC offers management accurate information by delineating support costs and tracing them to individual products and product lines.

If possible, it is best to do a trial study or test run on a department whose profit-making performance is not up to snuff. These types of situations have a greater chance of succeeding and demonstrating that an ABC program is worth the effort.

If the pilot study yields no savings in cost, the activity-based costing system has either been improperly implemented or, it may not be right for the company. The first thing a business must do when using ABC is set up a team charged with determining which activities are necessary for the product or service in question.

This team needs to include experts from different areas of the company including finance, technology, and human resources ; an outside consultant may also be helpful.

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After the team has assembled data on such topics as utilities and materials, it is time to determine the elements of each activity that cost money.

Attention to detail is very important:Starbucks has also been selling coffee to customers using a mail (phone) order system. Naturally, the company decided to sell on the Web. The use of the Web increased the number of orders from individuals and small businesses.

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A plan for reorganization Starbucks' supply chain transformation had support from the very top. In , Chairman, President, and Chief Executive Officer Howard Schultz tapped Gibbons, who was then senior vice president of global manufacturing operations, to run the company's supply chain.


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Activity based costing for starbucks

Strategy Formulation includes planning and decision-making involved in developing organizations strategic plans whereas Strategy Implementation involves all those means related to . Activity-Based Costing Activity-Based Costing Activity based costing (ABC) is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect capacity.

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