East West University

Accounting Report on ABC implementation on ACME Pharmaceuticals Ltd and

BIOPHARMA Pharmaceuticals Ltd

Prepared for:

Course Instructor: Tanzila AhmedCourse Code: ACT 201

Course Title: Managerial accounting Section: 05

Prepared by:

Name IDRatul Khandakar ***

Submission date: 19 AUGUST 2013

August 19, 2013

Tanzila Ahmed LecturerDepartment of BBAEast West UniversityAftab Nagar, Rampura, Dhaka

Madam,With due respect here I present my term paper on ABC Implementation In ACME Pharmaceuticals Ltd & Biopharma Laboratories Ltd Ltd. This paper focuses on the organizational structure on Activity-Based Costing (ABC) success in ACME Pharmaceuticals Ltd and Traditional Costing process in Biopharma Laboratories Ltd.

I would like to thank you for your guidance and support.

I have tried my best in preparing this paper. In spite our lack of experience in this field of work, I hope that we have been able to present a realistic and substantial report.

We will be glad to clarify any queries you may have regarding this paper.

Sincerely

Ratul KhandakarStudent of BBAEast West University

Acknowledgement:

I would like to express my gratitude to all those who gave me the possibility to complete this report.

I am deeply indebted to our course instructor Tanzila Ahmed, whose help, stimulating suggestions, knowledge and encouragement helped me in all the times of study and analysis of the assignment in the pre and post research period. I am also grateful to my seniors who helped me at a great extent to prepare this paper.

Most especially to my classmates and friends

And Specially to The Almighty Allah, who made all things possible.

Executive Summary:

This paper aims to investigate the effect of corporate culture and organizational structure on Activity-Based Costing (ABC) success in ACME

Pharmaceuticals Ltd and Traditional Costing process in Biopharma Laboratories Ltd. Data were collected by survey questionnaire and their website as well as using internet. The results indicate that ACME achieved a moderate level of ABC success and Biopharma Laboratories doesn’t follow ABC for their limitations. We found to affect the ABC success implementation significantly in ACME Pharmaceuticals Ltd and identify their limitations of Romania Biopharma Laboratories Ltd.. The culture factors of outcome orientation and attention to details were significantly associated with ABC success. The results also show that organizational culture factors were more strongly associated with ABC success implementation than organizational structure factors.

Contents:Introduction:-------------------------------------------------------------------------------------------------06Problem Statement:----------------------------------------------------------------------------------------06Purpose of the study:--------------------------------------------------------------------------------------06Objectives of the study:-----------------------------------------------------------------------------------07Methodologies of the study:-----------------------------------------------------------------------------07Limitations of the study:----------------------------------------------------------------------------------08ACME Laboratories Ltd.Inception:-----------------------------------------------------------------------------------------------------09Vision Statement:-------------------------------------------------------------------------------------------09Mission Statement:-----------------------------------------------------------------------------------------09Objectives of ACME:----------------------------------------------------------------------------------------10Traditional Product Costing System:-------------------------------------------------------------------10Comparison of traditional costing and ABC:----------------------------------------------------------11Sample of existing batch costing system:-------------------------------------------------------------12Conclusion:---------------------------------------------------------------------------------------------------14Biopharma Laboratories LtdResearch & Development (R&D):-----------------------------------------------------------------------15Quality Assurance (QA:------------------------------------------------------------------------------------15Production:---------------------------------------------------------------------------------------------------15Mission:-------------------------------------------------------------------------------------------------------16Vision:---------------------------------------------------------------------------------------------------------16Costing system:---------------------------------------------------------------------------------------------16Advantages & Disadvantages of Traditional CostingEasy to Apply:------------------------------------------------------------------------------------------------16Ability to Distort:--------------------------------------------------------------------------------------------17Outdated:-----------------------------------------------------------------------------------------------------17Activity-Based Costing:------------------------------------------------------------------------------------17Conclusion:---------------------------------------------------------------------------------------------------17References:---------------------------------------------------------------------------------------------------18

Introduction:

The report has been prepared for term paper with a view to stipulate the learning outcomes by conducting methodical research.

As I worked mostly at cost accounting department during the period of survey,I hunted for problem areas in product costing and allocation of cost elements, if any. Being one of the leading pharmaceutical manufacturers, dealing with thousands of products ACME also face difficulties while determining actual product costs especially in allocating the overhead costs. I walked through the problems in depth and tried to approach appropriate solutions. Hence, this report is the outcome of action research throughout the organization.

Problem Statement:

The problem statement is as follows, “problems with traditional costing system and how to overcome these by implementing more forward looking costing approach”.

Purpose of the study:

The purpose of this study is to investigate which are the practical problems in traditional costing system and supremacy of Activity Based Costing (ABC) in controlling cost and improving profitability. Moreover, this will shed the light on the procedure for implementing ABC system within companies that handle everyday transactions through operational and financial information systems. ABC provides the tool with which to go beyond gross margins and penetrate the real economics of all aspects of cost and profitability, including that of servicing customers. Implementation of ABC in a manufacturing setting can provide solutions to many of the critical business issues the pharmaceuticals industry is currently facing.

Objectives of the study:

I segregated the purpose on further pieces and hence defined the objectives of the study.The objectives of the report have been given bellow.• To analyze the existing cost accounting system.• Identify the shortcomings in existing system.• To develop the product costing on the basis of ABC• To analyses Internal control system.• To analyses accounting information systems as well as Profitability analysis on the basis of cost objects, i.e.; product based, geographic location.

Methodologies of the study:

This study started from completing a questionnaire by the respondents later, gathered information was made more detailed in the interview sessions of corresponding individuals; the information was also extended with problems which was beyond the scope of the questionnaire .The interviews were conducted with people employed in operational and accounts divisions; most of the time was given to people responsible for functioning of the activity-based costing system. To verify and extend the collected information, the interviews were followed by telephone conversations and e-mail messages. Gathered information was confidential and for that reason, the interviews were not recorded.

Following methodologies are used for conducting the study:• Primary data: On job observation and learning.Personal interviews and discussion with concerned personnel• Secondary data: The study based on secondary data. Data required for the study were collected from financial manual, inventory control manual, procurement manual, audit reports, financial press, web site of ACME and other texts book.

Limitations of the study:

The major limitations that I have encountered during the study and preparation of the report are as follows:• Restrictions as per the organizational policies to disclose some of the internal information and financial data in public.• The study based on the manual and other management reports within ACME.• Vastness of the accounting and cost accounting procedures of a big organization like ACME, which is really difficult to understand in such a short span of time.• Lack of adequate information and data.• Had to rely on some published information• cost constraints

ACME Laboratories Ltd.

Inception:

ACME Laboratories Limited is leading Pharmaceuticals Company in Bangladesh established in the year 1954. The company has a very big manufacturing plant located at Dhamrai, 40 kilometer away from the central of Dhaka city. The company produces various types of dosages’ forms which include tablets, capsules, oral liquids, ampoules, dry powder vials, powder for suspension, nasal Drops, eye drops, infusion, injection etc.

Since its inception, ACME has been lunching and innovate products in order to fulfill unmet demand of the medical community. The focus has to bring more new technologically advanced molecules to this country.

The company operates in a single industry segment, it has its own manufacturing facilities, and the principal activities of the company are formulation, manufacturing and sales drugs in home and aboard.

Vision Statement:

Our vision to ensure Health, Vigour and Happiness for all and is on a Perpetual quest for excellence.

Mission Statement:

Our holistic approach is to ensure Health, Vigour and Happiness for all by manufacturing ethical medicines of the highest quality at affordable prices and expanding in the local and global market. We view ourselves as partners with the doctors, healthcare professional, all other customers, our employees and harmonize with environmental issue.

Objectives of ACME:

• ACME wants to discover, develop and successfully market innovative products to cure diseases, to ease suffering and to enhance the quality of life.• It wants to be recognized for having a positive impact on people’s lives with our products, meeting needs and even surpassing external expectations.• It strives to create sustainable earning growth. Ranking in the top quartile of the industry and securing long-term business success.• It wants to build a reputation for an exacting workplace in which people can realize their professional ambitions.• ACME strives for a motivating environment where the creativity and effectiveness are encouraged and where cutting-edge technologies are applied.

Traditional Product Costing System:

Under existing system, factory overhead cost is not included in product batch cost. Product costs are determined on the basis of direct raw materials and packing Materials cost. Under the traditional costing system, direct labor and factory overhead could not be ascertained to product directly. As consequence, these costs were apportioned as a percentage (%) of material cost for the product, which didn’t really allocate the true cost for producing that particular product, i.e. did not consider the cost drivers.

As a result, costs for some products were over charged and some were under charged and accordingly priced without reflecting true cost for particular product, pursuing suboptimal decisions. Moreover, decisions making for contract sales under spare capacity were not appropriate because of failure to identify true production costs for relevant product.

In this persistent risk of taking suboptimal decision, the company’s divisional head(accounts & finance) formed a team to look for more forward looking costing system which will facilitate true allocation of cost, thereby ensure optimal decisions regarding production mix or subcontracting sales. After comprehensive analysis of the problems, literature review and group discussion including me, it was proposed to introduce Activity Based Costing (ABC) to address this issue.

Comparison of traditional costing and ABC:

According to AICPA (2004:2), the basic distinction between traditional cost accounting and ABC is as follows: traditional cost accounting techniques allocate costs to products based on attributes of a single unit. Typical attributes include the number of direct labor hours required to manufacture unit, purchase cost of merchandise resold or the number of days occupied.

Allocations, therefore, vary directly according to the volume of units produced, the cost of merchandise sold or the days occupied by the customer. In contrast, ABC systems focus on activities required to produce each product or provide each service based on each product or service’s consumption of the activities. Using ABC, overhead costs are traced to products and services by identifying the resources, activities and their costs and quantities to produce output. A unit or output (a driver) is used to calculate the cost of each activity consumed during any given period of time.

An ABC system can be viewed in two different ways. The cost assignment view provides information about resources, activities and cost objects. The process view provides operational (often non-financial) information about cost drivers, activities and performance.

The traditional method of costing system usually allocates costs based on a single volume measure, such as direct labor hours or machine hours. While using such a simplistic volume measure to allocate overheads as an overall cost driver, this approach seldom meets the cause-and-effect criteria desired in accurate cost allocation. This method of costing become increasingly inaccurate as the relative proportion of overhead costs rises.

This distortion of costs can result in inappropriate decision-making.ABC is therefore an alternative approach to the traditional method or arbitrary allocation of overheads to product, services and customers.

Sample of existing batch costing system

Traditionally, direct labor and factory overhead were allocated as a percentage of material costs,i.e.; 25% of material cost.Production cost per unit= Tk 12.01 + 25% of 12.01=Tk 15.01

Conclusion:One of the most important decisions that a manufacturing company should make is to determine the product mix that will maximize profits. Given that a company has capacity constraints, it may not be able to produce every unit of product demanded by the market.

The best action to take in this case is to focus on the most profitable products for the company and to use all the existing resources of the company to produce these products. In this way the company can increase its profitability because it will use its existing resources to produce the most profitable products. It is also clearly apparent in ACME laboratories ltd. that production and selling of most profitable products can impact net profit substantially given the same revenue. That is how ABC contributes in value creation process under constraining factors.With regard to the empirical study conducted, all the respondents categorically stated that ABC is more accurate and complete as it encompasses the entire value chain as opposed to traditional costing methods such as standard costing, which excludes taking the product through the value chain. Traditional overhead costs are allocated to products and services by volume, therefore penalizing high volume products and subsidizing low margin/high cost products. ABC cost allocation is driven by volume and other relevant cost drivers, for example setups, number of orders, number of batches, process time etcetera. Identifying and understanding the cost drivers, lead to better management decisions and controls.

In competitive environments, managers require better information, not only about their products and services cost, but also about the cost of the different activities needed to create these products or services. Traditional accounting systems do not provide this information. The activity-based management approach allows everyone in the organization to understand where costs are being incurred, why they are being incurred and how these activities contribute to a higher value added to customers. Additionally, ABC seeks to identify activities that can be eliminated or improved. It can also be added that, if all company employees follow the activity-based approach, communications improve and changes are easier to make.

Biopharma Laboratories Ltd

Biopharma is one of the fast growing pharmaceutical companies in Bangladesh . It is now manufacturing more than 250 products including life saving drugs at affordable cost and committed to serving the need of ailing community with products of excellent quality, safety and efficacy complying the guideline of regulatory requirements of WHO cGMP and Quality Management System.

Research & Development (R&D)

Our R & D activities are based on the motto striving for the timely development of products that responds to and satisfies the customer's needs. Our R & D capabilities not only allow us to provide you with what you need today, but also provide us with anticipation and innovation to provide you with what you need tomorrow. You can trust our products as we guarantee them.

Quality Assurance (QA):

A Department consists of highly skilled and well trained personnel always follow the guideline of WHO cGMP in all areas of operations to ensure highest quality products. It is well equipped with most modern and sophisticated equipments. In order to ensure highest quality in every sector, QA Department carries out periodical inspection either internal (to all section related to manufacturing) and external (to raw material manufacturer). The Department also monitors the quality of finished products during the shelf life after its marketing.

Production:

Our production lines are designed to meet the local and global demands. We are now manufacturing products of almost all the therapeutic groups in different dosage forms such as tablets, capsules, syrup¸ suspension, dry powder for suspension, cream, ointment and injectables. We combine machine technology and skilled human resources to produce highest quality products. The production lines are well equipped with high tech machinery. All machines are operated by well trained persons and supervised by our experts. These machines are also maintained and upgraded periodically by our trained and experienced engineering team to ensure good running condition.

Mission:

To serve mankind

To build customer's trust as a trusted company both in products and services.

To ensure healthy and sustainable growth of each concern.

To maintain the quality in all areas of operation by continuous development of human resources.

To build strength carefully in important areas that offers the resources for tomorrow's business opportunities.

Vision:

The vision of Biopharma is to play the leading role in pharmaceuticals sector of the country by providing safe, effective and finest quality products which will bring benefit to people improving quality of life.

Costing system:

Biopharma Laboratories Ltd use traditional costing system. They use costing methods to allocate costs to various products and services. They add up all costs of manufacturing a product in order to assign a total cost to it. This includes direct costs, such as labor cost, and overhead costs, such as depreciation on machinery. They use traditional system because it is easy to prepare and low costing.

Advantages & Disadvantages of Traditional Costing Easy to Apply:

Traditional costing is relatively easy to apply. It's easy for managers to trace all direct costs associated with a product, including labor and direct material costs. It's more tricky to assign overhead costs to different products. In a traditional manufacturing environment, direct labor hours were a simple way to apportion overhead costs. At the time traditional costing methods were developed, direct labor was typically the biggest cost of production. Therefore, it was used as a proxy to allocate overheads too, with managers assigning higher overheads to products with higher direct labor hours.

Ability to Distort:

For a business that manufactures a large volume of a few products, traditional costing could provide a good idea of the costs of manufacturing a product. However, as the level of diversity in output rises, traditional costing becomes less reliable. Firms that have a lot of overhead expenses need a more reliable method to allocate the overhead costs to different products. If a business uses incorrect costing to allocate costs, it could price its products incorrectly. This might affect its competitive position.

Outdated:

The manufacturing environment has changed in the decades since traditional costing methods were developed. Machines and computers are used more often. Technological developments have led to a decreased need for labor in manufacturing processes. This means that a system that uses direct labor as a proxy for allocating different overheads is outdated. This has led to the development of alternatives, such as activity-based costing.

Activity-Based Costing:

One more recent way of allocating overhead costs is the activity-based costing method. In this method, the business finds out what all of the different activities are related to manufacturing its products. It then assigns costs to different activities, such as ordering materials. Then it allocates a share of this activity cost to different products or services based on the share of the activity that each product or service uses.

Conclusion:As the part of our study, we have selected to analyze the problems with existing costing system and how to overcome these by using activity based costing-as tool of cost control and improved profitability. ABC is a practical tool that can be used by companies of all sizes not only to better determine the cost of their products, but also to better understand why they cost what they do. But successful implementation largely depends on top management’s commitment, well-trained team, software support and crucially identifying accurate cost drivers.

References:

http://www.dhakayellowpages.com/http://www.acmeglobal.com/acme_laboratories.htmhttp://www.biopharmabd.com/pharma/http://smallbusiness.chron.com/differences-between-traditional-volumebased-activitybased-overheadcost-allocation-systems-35899.htmlhttp://www.assignmentpoint.com/science/pharmacy/report-on-marketing-mix-on-pharmaceutical-industry-a-study-on-biopharma-laboratories-ltd.htmlhttp://en.wikipedia.org/wiki/Pharmaceutical_industry_in_Bangladeshhttp://www.google.com.bd/url?sa=t&rct=j&q=abc%20implementation&source=web&cd=1&cad=rja&ved=0CCoQFjAA&url=http%3A%2F%2Fwww.imanet.org%2FPDFs%2FPublic%2FResearch%2FSMA%2FImplementing%2520Activity%2520Based%2520Costing.pdf&ei=LhsRUrCnIMTorQeLwIG4AQ&usg=AFQjCNFSMITbFJDsE6KoT4UztrgXIXoasAhttp://wiki.answers.com/Q/What_is_a_traditional_costing_systemhttp://financialsupport.weebly.com/activity-based-costing-abc-and-traditional-costing-systems.html

QUESTIONNAIREACME PHARMACEUTICAL LTD & BIOPHARMA LABORATORIES LTD

PROJECT TITLE:   IMPLEMENTATION OF ACTIVITY -BASED COSTING

Dear sir/madam,

Myself, Khondaker Munjurul Islam (on behalf of my group), I am conducting this entitled survey “Implementation of Activity Based Costing” as a project work in BBA program. I request you to kindly fill up the following questionnaire, giving your free and frank option. The given information will be kept confidential and used for academic purposes. I will be thankful for your positive response.

1. Type of Organization □ Public □Private

2. Do you adopt ABC System?□ Yes □ No 3. How would you characterize the management style of your organization? □ Dictatorial

□ Autocratic

□ Democratic

□ Liaise Fare 4. What % of implementation team member's time was devoted to the project? Not Less than Over Applicable 10% 11-25% 26-50% 51-75% 75% ABC Sponsor □ □ □ □ □ □

Champion □ □ □ □ □ □

5. How would you characterize your management commitment to ABC? Not a priority □ Low priority □ Some priority □ High priority □ Top priority □

6. How would you rate your ABC implementation on communication of the objectives and rationale for the project? N/A Poor Fair Average Good Excellent □ □ □ □ □ □

7. How would you rate your ABC implementation on commitment from senior executives? N/A Poor Fair Average Good Excellent □ □ □ □ □ □

8. How would you rate your ABC implementation on the following criteria? N/A Poor Fair Average Good Excellent Cross-functional representation on project team □ □ □ □ □ □Analysis performed by team

of activity and product costs □ □ □ □ □ □

9. How would you rate your current ABC system on the following criteria? N/A Poor Fair Average Good Excellent

Current system supports And overall business needs □ □ □ □ □ □is cross-functional

10. How would you rate your ABC implementation on understanding and acceptance by participants of the key activities? N/A Poor Fair Average Good Excellent □ □ □ □ □ □

11. What area of decision marking does use ABC information? N/A Poor Fair Average Good ExcellentPlanning & budgeting □ □ □ □ □ □

Process/operation management □ □ □ □ □ □

Outsourcing decisions □ □ □ □ □ □

Product/service management □ □ □ □ □ □ decisions Restructuring/organization □ □ □ □ □ □ decisions

Product/service development □ □ □ □ □ □ strategies and decisions

Driving process improvement □ □ □ □ □ □ efforts

Identify opportunities for □ □ □ □ □ □ improvement Linked to performance measures □ □ □ □ □ □

12. What type of training is being provided for users of the ABC system?

Mechanics of ABC system □ Public seminars

□ Applications/uses □ In-house

seminars □ Conceptual understanding □ Implementation

steps □

13. Has the results of decision action changed by using ABC information?

No Minor Moderate Significant Very significant changes changes changes changes changes changesChanged pricing & cost recovery strategies □ □ □ □ □ □

Changed custom support or services □ □ □ □ □ □

Changed process □ □ □ □ □ □

Outsourcing activities or processes □ □ □ □ □ □

Changed program delivery channel □ □ □ □ □ □

Changed strategies focus □ □ □ □ □ □

Reorganized/restructure □ □ □ □ □ □

14. Has the financial situation been improved by using ABC?

No Minor Moderate Significant Very significant Overhead support □ □ □ □ □ □

Service efficiency □ □ □ □ □ □

Customer satisfactions □ □ □ □ □ □

Program/service design □ □ □ □ □ □

Program/service delivery □ □ □ □ □ □ 15. What levels of personnel were involved in the ABC site implementation?

Somewhat Moderately Very Extremely N/P Involved Involved Involved InvolvedSenior management □ □ □ □ □

Senor finance personnel □ □ □ □ □

Operations managers’ □ □ □ □ □

Func. Groups managers □ □ □ □ □

Supervisors/team leaders □ □ □ □ □ Line personnel

16. Which functional group(s) were involved in the ABC site implementation?

Somewhat Moderately Very Extremely N/P Involved Involved Involved InvolvedAccounting/ finance □ □ □ □ □

Personnel/HR □ □ □ □ □

Information service □ □ □ □ □

Quality □ □ □ □ □

Purchasing/ procurement □ □ □ □ □

Program management □ □ □ □ □

Customer service □ □ □ □ □

Service delivery □ □ □ □ □