This preview shows page 1. Sign up to view the full content.
Unformatted text preview: Advanced Enterprises Pharmaceuticals
By: Darren Wong (306153149), Nilar Alom (200418558) 1 Executive Summary
The following report was prepared for the president of Advanced Enterprises. The report aims to demonstrate Advanced's costing system under both the traditional costing and activity-based costing. The report hopes to reveal the inaccuracy of traditional costing and the precision of the newer activity-based-costing method. The presentation will show that under the ABC system the drugs Diomycin and Homycin were overpriced and Addolin was rather significantly (15%) underpriced when compared to traditional costing. A pharmaceutical company such as Advanced Enterprises contains considerable product diversity and should therefore implement an accurate product costing system. Production of different drugs, require different production methods and therefore cannot rely on one cost driver such as direct labour hours to allocate overhead costs. An analysis of both costing systems; activity-based-costing and its current method traditional costing reveal different cost allocations. ABC uses a number of cost drivers to allocate overhead costs to the three drugs which ultimately prove more accurate than depending on a single cost driver - direct labour. The incorrect allocation of costs can lead to the under and over-pricing of products and an inefficient product mix. Consequently, this could lead to profit loss and failure of its market share. It is recommended that Advanced Enterprises implements the activity-based-costing method to allocate its costs and the re-pricing of its products in light of the new found information.
2 Background Advanced Enterprises is currently using Traditional Costing System Dr Lone, president of the company is interested to see whether ABC system is a better costing system Under Traditional system: The cost/unit increases respectively from Diomycin, Homycin and Addolin. This is reflected through its production volume: production volumes decrease as cost increase proportionally Could Dr Lone better increase the analogy by 3 applying ABC system? Assumptions
Assumptions No other costs, or that the cost drivers are accurate We hold all other external factors to be constant such as cost of labour hours or cost of materials 4 Analysis
Want to know which system work best for the company ABC system will be carried out to see whether any of the following changes Changes to the O/h cost/unit under ABC Changes to the COGS manufacturing cost/ unit
5 Activity pools have been identified with corresponding cost drivers Cost pools are assigned to the product line through consumption of cost drivers See Appendix Table 2.1 5 Findings
P e C m a o - C s P Un ric o p ris n o t er it D iomycin H omycin A ddolin T ditiona $ystem $ 1 6 $ 1 2 ra lS 0 3 .7 .1 .8 A Cs B ystem 0 4 $ 1 0 $ 2 5 $ .6 .1 .1 %difference1 .0 % A5 5 ba ed on B % -1 .3 % 4s6 C .4 5 5 - Under the traditional costing, both Diomycin and Homycin were overpriced in comparison to ABC system - However Addolin cost was under priced - Therefore the % difference variation is irregular between the 2 systems
6 Findings cont.
This further illustrates that the % difference variation is irregular and not consistent between the 2 systems. Thus could be due to the use of one cost driver under the current method. 7 Recommendations
Convert to the ABC costing system A more accurate and relevant way to assign overhead costs Benefit of converting to ABC outweighs the cost of conversion from traditional Price Reconsideration In light of the new information the company should reprice its 3 drugs relative to their new allocated costs Production Volumes costs of drugs have changed, especially in relation to each other; perhaps a restructure of the production volume should be implemented e.g. produce less Addolin and more of Diomycin or Homycin as it would be more profitable
8 Limitations Cost of implementation of ABC Re-train all employees to ABC system Use of multiple cost drivers makes the process much more complicated and longer to prepare e.g. more drivers means more aspects to be monitored Large financial commitment required as a result of more attention to detail that is used in ABC Behavioural effects Change to ABC might mean the company changes its production volume, this change of behaviour may lead to profit or losses as the firm may move away from the drug such as Addolin in light of higher cost which may be the company's best selling product Thus more information is required to make this judgement effectively. Competitor Pricing Price of competitors will dictate much of the profits to be made. Even though ABC has found more accurate costing for products, it might be useless as the firm cannot just change its prices to the way it sees fit
9 Action Items Persuade top level management to switch to ABC system Implementation of ABC May require the hiring of new jobs, training of staff, new equipment and monitoring techniques etc. Product pricing Upon analysis of new cost prices adjustments made to the prices of the three drugs should be made in order to capture possible profit opportunities Batch amounts The correct product mix should be found in order to create the most profitable amount of each drug to be produced Further Research Perhaps further research should be tested before changing price or production values although it may look appropriate on paper however, when in practice other factors such as competitor pricing, cost of implementation etc can greatly effect desired results
View Full Document
This note was uploaded on 10/21/2008 for the course ACCT 2012 taught by Professor Frost during the Two '08 term at University of Sydney.
- Two '08